Cannabis Stocks Are Extremely Oversold

Cannabis stocks finally rallied this week slightly. Since we shared our sector bullishness in this newsletter a few weeks ago, the Global Cannabis Stock Index has actually dropped a lot. The index is up nearly 4% from the multi-year closing low set during this week, and, at 16.34, it is down about 15% in June and has fallen…

by over 50% in 2022. With little chance of recovering the June loss in the next four days, it appears that this will be the 18th consecutive monthly decline. We will soon detail the performance for the month of all seven of our indexes.

This weekend in a video for subscribers at 420 Investor, I described how a lot of the stocks I follow are testing or have taken out the lows from March of 2020. Since then, the S&P 500 is up about 77%. Simply put, the cannabis sector has been absolutely hammered. We have shared in the past our reasons for being bullish: the expansion of many state markets into adult-use, the addition of new dispensaries in Illinois and very low valuations in our view.

We always try to understand the sentiment in the cannabis sector. Right now, sentiment is generally negative, which encourages us as contrarians. When we look at the stocks and the sub-sectors, we see a very oversold market. The Global Cannabis Stock Index made a new 52-week closing low this week at 15.76 on Wednesday. For perspective, we think it’s important to remember that the closing low in March 2020 was slightly higher than our close Friday (16.42 then, 16.32 now). It’s a near double-bottom!

The American Cannabis Operators Index is down a bit less than the overall market, having declined by nearly 47% in 2022, while the Ancillary Cannabis Index has fallen by more (53.8%). While the overall Canadian market has declined about the same as the overall market, the largest ones have been sold aggressively. Canadian Cannabis LP Tier 1 Index, which consists of five companies doing more than $30 million in quarterly revenue, has declined more than 56% and trades well below the 2020 low now. Aurora Cannabis, Canopy Growth, HEXO Corp. and Organigram have made recent lows below the 2020 lows, while Tilray still holds above its 2020 low.

When looking at the prices, there are two factors that we like to assess: oversold and overextended. The way we measure oversold is by comparing to the 150-day moving average, and the 29 stocks on the 420 Investor Focus List are anywhere from 13% to 76% below that level currently. The average is 43% below. This is quite oversold in our view. When looking at a chart, we define a trend as overextended when the 10-dma has been below the 50-dma and the 50-dma below the 150-dma for more than 13 weeks. The stocks are for the most part overextended to the downside, with several names reaching that point in mid-July.

Cannabis stocks being oversold and overextended to the downside sets us up for at least a…

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