Seed Investor December 5, 2018
When Will Marijuana Stocks Bottom?
If you’re watching marijuana stocks, the one thing is that is clear is buyers have pulled out of the market.
Even light selling pressure can send a marijuana stock down 10% or more in a few seconds or minutes.
There are a handful of bright spots, but pretty much the entire marijuana stock sector has fallen off a cliff.
It’s bad. Very bad.
But one thing is for sure, this sell-off won’t last forever.
That’s why we’re going to review two things to watch to know when the bottom will finally be in for marijuana stocks.
First things first.
It’s important to note this level of decline is not unprecedented in the marijuana sector.
The current decline is, as it stands today, on par with the last two corrections.
In fact, it’s about as severe as the last two major corrections in marijuana stocks according to the data below.
Here we broke down the Canadian Marijuana Stock Index from when all this started in 2016 up until today:
2016 Bull Market:
Canadian Marijuana Stock Index: 88 to 348
Total Gain: 288%
Subsequent Correction: -42%
2017 Year End Rally:
Canadian Marijuana Stock index: 204 to 853
Total Gain: 376%
Subsequent Correction: – 47%
2018 Canadian Legalization Run Up:
Canadian Marijuana Stock index: 518 to 853
Total Gain: 65%
Subsequent Correction: – 46%
As you can see, the current correction is right in line with the last two corrections.
However, that doesn’t mean marijuana stocks are about to bottom just yet for two reasons.
The first reason marijuana stocks probably haven’t bottomed yet is because this correction has been much sharper than the last two.
The current 46% drop in marijuana stocks has come over about a month and a half. The other two corrections were spread out over six to nine months.
That means an old bubble-bust principle will come into play.
You know hangovers are directly correlated to the size of the previous evening’s party.
The same is true in stocks.
The larger the stocks “overshoot” in the exciting run up, the more they will “undershoot” during the correction.
Last week hit the same point they were back when this rally began.
This week they took another leg down and are in “undershoot” territory.
Once stocks undershoot below past support levels, there’s no telling how low they go until a capitulation panic sell-off ends it all.
The second reason marijuana stocks haven’t bottom yet is because of the time of year.
This sell-off has been bad, but what could be even worse is the timing.
This current downturn has coincided with the tax-loss selling season which has historically put a lot of pressure on the small and micro-cap stocks which dominate the marijuana sector.
This is fuel for the fire and will make any downturn far worse than it should be.
That’s the bad news though.
The good news is that the worse this correction gets, the better the bounce back will be.
We consider 2019 to be a pivotal year for legal marijuana and, despite how bad the stocks look at the moment, there will be some big winners ahead.
If marijuana stocks continue to fall, the big winners in 2019 will be even bigger.
The Seed Investor
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