Outside the Box: How to tell when a marijuana-stock rally is real or a mirage

Financial Services


As marijuana stocks have rallied recently, many investors have gotten in over their heads.

Once they get in, some begin to realize their positions are too big and find it hard to figure out what to do next. On the other end of the spectrum are investors oblivious to the risks.

For both groups, investors are forgetting that marijuana stocks can be volatile. When I wrote “How to potentially become a marijuana millionaire, albeit carefully,” the most important word in the headline was “carefully.” Some will gain, but many more will lose.

Investors need an edge. And segmented money flows provide that edge. Let’s examine with the help of a chart.

Chart

Please click here for a chart showing segmented money flows in 15 popular marijuana stocks. Please note the following:

• The real reason behind the latest move has been short squeezes and not a change in fundamentals. I will explain short squeezes later on.

• As the chart shows, momo (momentum) crowd money flows are extremely positive in Aurora Cannabis

ACB, -2.32%

Canopy Growth

CGC, -3.11%

Cronos

CRON, -8.73%

and Tilray

TLRY, -0.94%

Please see “If you buy only one marijuana stock, this should be it.”

• As the chart shows, momo crowd money flows are positive in Aphria

APHA, -1.46%

Liberty Health

L, -0.77%

MedMen

MMNFF, -1.96%

Green Organic Dutchman Holdings

TGODF, -1.45%

and New Age Beverages

NBEV, -2.75%

Please see “What to do now if you own, or want to buy, marijuana stocks.”

• In contrast, smart money flows are neutral in these stocks with the exception of Aurora Cannabis. Smart money flows in Aurora Cannabis are mildly negative.

• Momo crowd money flows are positive in GW Pharmaceuticals

GWPH, +5.50%

Scotts Miracle-Gro

SMG, -1.73%

and Constellation Brands

STZ, +0.67%

Smart money flows in these stocks are negative.

• Both smart money flows and momo crowd flows are positive in Corbus Pharmaceuticals Holdings

CRBP, +5.49%

• Momo crowd flows are negative in Craft Brew Alliance

BREW, +0.00%

• Momo crowd money flows are positive in marijuana ETF

MJ, -2.53%

but smart money flows are negative.

• Marijuana stocks have once again become uncorrelated to the Dow Jones Industrial Average

DJIA, -0.25%

S&P 500 ETF

SPY, +0.12%

and Nasdaq 100 ETF

QQQ, +0.20%

Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.

Short squeezes

The real reason behind the recent rise in marijuana stocks is short squeezes.

A short squeeze occurs when short sellers either panic or are compelled to buy to cover shares that were previously short sold. This leads to a lot of artificial buying that is not based on fundamentals.

In the chart, under the short squeeze column is shown the positioning for other short squeezes. For example, Cronos short squeeze money flows are extremely positive. This means that on slightly good news, Cronos can experience a significant spike because of a short squeeze.

Rankings

The chart also shows the relative rankings of the 15 popular marijuana stocks. The rankings are based on the six screens of the ZYX Change Method. (Please click here to learn about the six screens.)

Risk-adjusted rankings are more useful for medium- and long-term positions. Non-risk-adjusted rankings are more useful for short-term or trade-around positions.

What to do now

This leg of this phase of short squeezes is ending. There is a distinct possibility of another short squeeze leg. However, unless another short squeeze leg starts, there is a sell signal here.

Those who are simply doing short-term trades (not long-term investments) may consider taking profits here and consider jumping back in if another short squeeze leg starts.

Those who are aggressive and holding marijuana stocks may consider continuing to hold core positions but take partial profits on the rest.

Those who are holding positions larger than core positions or trade-around positions may consider taking partial profits.

Those who are growth-oriented and holding marijuana stocks may consider trimming core positions at the edges by taking partial profits.

Those not in marijuana stocks may consider waiting patiently for signals to buy select marijuana stocks.

Arora’s 14th Law is directly applicable in this situation: To be successful at investing and trading, become a master of position sizing. Position sizing is critical to investing in marijuana stocks. In addition, using techniques such as trade-around positions is especially important.

Please also read:

To invest successfully in marijuana stocks, avoid this one thing

How to survive marijuana stocks’ rollercoaster ride

Seven reasons Big Tobacco is likely to make a move on the marijuana industry

Tilray is the poster boy of short-squeeze stock candidates — here’s how to find others

Marijuana beverages are the new thing, but investors should only take sips

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

Nigam Arora is an engineer, nuclear physicist, author, and entrepreneur and the founder of two Inc. 500 fastest growing companies. He is also the developer of the ZYX Change Method to profit from change by investing. The premise is that most money is made by predicting change before the crowd. Arora is the chief investment officer at The Arora Report and the editor of four newsletters that track the ZYX Change Method. Nigam can be reached at Nigam@TheAroraReport.com

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