When the link between fundamentals and valuations stretches too far, the only rules stocks obey derive from sentiment and statistics. That’s where the big cannabis cultivators are now.
I track the six largest stocks in the group. They’re up a collective 10 percent this week on what amounts to a rumor that Congress is finally ready to start talking about rolling back regulations nationwide.
That would be a huge development for these largely Canadian companies. However, it’s still almost entirely hypothetical. Any bill would need to work through the House and then get taken up in the Senate before reaching the White House.
The process could easily take months. By that point, we’re already looking toward the 2020 election cycle and all controversial legislation will pause while lawmakers fight out their differences at the ballot box.
These companies are still another year away from good news. Nothing changes in the meantime. The Canadian market remains its own animal and U.S. sales are allowed on a state-by-state basis.
So, what drove these stocks up 10 percent this week? Sentiment and statistics. The mood around Big Cannabis has gotten extremely ugly since the summer, with the stocks I track down a collective 60 percent.
That’s a shocking amount of downside for stocks to permanently absorb. The selling is usually exaggerated. When the pendulum swings back from the extreme, there’s almost always a bounce.
These stocks are getting that bounce now. Whether it evolves into a full-fledged rally remains to be seen, but at this stage the core principles of market physics are in control.
A stock in motion will remain in motion until the mood changes. Talk of nationwide deregulation changed the mood or at least shook investors out of what’s now habitual gloom.
People are looking at stocks like Aurora Cannabis Inc. (NYSE:ACB) and Canopy Growth Corp. (NYSE:CGC) again. There’s more upside potential here than there was a week ago.
I’m telling my Turbo Trader subscribers to ride the wave on select names. There’s no reason to ignore a rally like this when cash is flowing.
We didn’t buy these stocks when they were flying high. As a result, we don’t need them to recapture their lifetime peaks to make money.
All we need is for market physics to keep the stocks moving a few percentage points farther than the S&P 500. That’s how swing traders beat the market, even when the stocks themselves are moving on nothing but rumor and momentum.
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