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‘In Cannabis we trust’… Canada launches legal pot

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From Richard Smith, Founder, TradeStops:

Wednesday, Oct. 17 was the big day. At the stroke of midnight, stores in provinces all across Canada opened their doors, ready to sell legal marijuana products.

Eager customers waited for hours in lines that were hundreds deep.

As Canada became the second country in the world to legalize marijuana across the board — and the first G7 country to do so — there were comparisons to America’s repeal of prohibition in the 1930s.

There are still strict rules in place. Edible marijuana products won’t be available for another year. And Canada’s largest province, Ontario, has delayed the opening of physical stores until April, though pot is available online or through the mail.

Nonetheless, the big day has come. There are 129 licensed cannabis producers in Canada, and the legal cannabis market is forecasted to be worth tens of billions worldwide in less than a decade. The United States alone is on track to do $11 billion in 2018, and that is with legalization in only nine U.S. states.

Below is a sampling of popular cannabis-related stocks (along with MJ, a U.S.-traded pot stock ETF). You may notice something about these names: Volatility (VQ) on average is high, and the Stock State Indicators (SSI) are almost all green.

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The stock market has had a rough ride these past few weeks and there have been few places to hide. The S&P 500, the Dow, small caps and even the once-bulletproof FANG group of tech stocks were all hit.

But weed stocks have held up well with bullish chart patterns and resilient price action. Investors seem to be saying, “In cannabis we trust.”

There are some big caveats here though. For example: No self-respecting value investor would buy a pot stock because the valuations are insane.

What’s more, most of these names are not turning a profit; they are almost all burning cash. Worse still, in the absence of a price-to-earnings ratio (because the earnings don’t exist), many pot stocks are trading at hundreds of times sales.

Cannabis stocks are trading at wild valuations because they are a true growth story. As we’ve explained, the legal cannabis market has the potential to be worth tens of billions, or even hundreds of billions, on a global scale over the next few decades. We are seeing a kind of marijuana gold rush.

Growth stocks with nosebleed valuations can maintain those lofty levels for years or sometimes even decades. For proof of this, just look to Amazon.com and the entire biotech sector. To maintain the excitement, it helps to have news flow and a powerful narrative — interesting stories and a steady stream of compelling blue-sky press releases to keep investors engaged.

Cannabis stocks have this in spades. The possibilities around the marijuana space are truly eye-opening.

Consider the research angle, for example. Very little high-grade botany research has been done on cannabis plants. Compared to tomatoes, corn, or wheat, there are decades’ worth of catching up to do.

For cannabis researchers — who are now seeing huge inflows of funding from both the private sector and various levels of Canadian government — this creates the potential for major advances in a very short space of time. The press releases on such advances could keep investor sentiment booming for years.

Changes to the plant genome have the potential to dramatically increase crop yields, and research in molecular genetics means scientists could soon be engineering entirely new properties into cannabis plants. There is potential to make the “high” far more potent, develop specialized strains for medical use, or any number of other things that could change the game for cannabis companies.

Possibilities like these — plus a truly global market that is only now opening up — have the potential to keep investors riveted, which could keep valuations high.

Then, too, there is the commercial potential — especially in the United States. For instance, it’s estimated that the market for cannabis-infused drinks, which ranges from wellness to alcoholic beverages (think weed-based beer), has the potential to be worth $600 million by 2022.

There are reasons to be cautious though. The cannabis sector is not just priced for growth at the moment; it is priced for hydroponic hypergrowth. This could lead to challenges down the road, or severe share price haircuts if profit margins do not materialize in the manner expected.

Take the marijuana black market for example — the illegal channels by which Canadians had already been buying billions of dollars in recreational weed for years.

If Canada’s black market is harder to kill than some might expect — or if retail prices fall hard due to intense competition and heavy overinvestment — some of the stocks listed above may not live up to expectations. Others may never turn a profit at all.

And then there is the waiting juggernaut of U.S.-based competition.

Some analysts think that, while Canada has an obvious and powerful head start on the legal weed market, it is only a matter of time before American companies muscle in, armed with bigger advertising budgets and stronger commercial instincts.

American politicians are already hammering on the door. Sen. Ron Wyden of Oregon said the following in a prepared statement: “Now that our neighbor to the north is opening its legal cannabis market, the longer we delay, the longer we miss out on potentially significant economic opportunities for Oregon and other states across the country.”

If you want fast and easy exposure to cannabis stocks, take a look at the Alternative Harvest ETF (symbol MJ). It’s an exchange-traded fund primarily composed of Canadian pot stocks, the top 10 holdings of which are shown below (via Yahoo Finance):

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Our sense is that, due to the extreme valuations and hypergrowth orientation of cannabis stocks, these names may better serve as medium-term trading vehicles, rather than long-term investments.

This means keeping an eye on the cannabis industry for buying opportunities created by short-term pullbacks or temporary bouts of pessimism in the space, creating attractive entries on a return to bullish trend.

Ideas by TradeSmith, our algorithm-based stock selection software tool, offers the Low Risk Runner screen designed for identifying exactly these kinds of opportunities.

You wouldn’t want to buy cannabis stocks as a set-and-forget retirement play; there is far too much embedded volatility and uncertainty for that. But for the bold and the nimble, there could certainly be opportunity here.

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Richard


Crux note: Volatile pot stocks may not be the right place to stash your nest egg… But as Richard says, there’s opportunity in this market… if you buy in using the right tools…

TradeStops takes the guesswork out of the equation by telling you when to buy a winner at the right time and when to sell a losing stock – meaning you can make more money while taking less risk.

Richard’s philosophy is to cut your losses and let your winners ride… And his results speak for itself. You can discover why one satisfied investor called TradeStops his “safety net” right here.


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Retail earnings reports, China trade impact

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CNBC’s Jim Cramer on Friday said he expects more of the same in the week ahead of stock trading.

“Next week, once again, is all about trade and retail,” the “Mad Money” host said. “This is the week when most retailers report, so we will be listening closely to what they say about the trade war.”

Monday: Trade watch

The stock market will confront the same issues on Monday as the week prior. The days following will see a lot of retailers hold conference calls, and Cramer is looking to see what they have to say about tariffs on Chinese imports.

“The market will punish companies that source in China and reward companies that don’t, because that’s what [President Donald Trump] is doing,” he said.

Tuesday: Home Depot, TJX, Nordstrom

Home Depot: The home improvement retail giant reports earnings before the bell. Cramer is expecting weather to weigh on earnings again.

“There’s much too much rain this gardening season, and I bet that hurt them,” he said. “I still believe Home Depot can tell a decent story about trade, but it won’t matter if gardening season, their equivalent of Christmas, turns out to be a bit of a bust.”

TJX: The T.J. Maxx parent delivers its quarterly results to shareholders in the morning.

Nordstrom: The luxury department chain has an earnings call at the end of trading. The stock is down more than 20% this year and more than 27% in the past 12 months.

“At these levels, it pays you a 4% yield. I think it may be too cheap to ignore,” Cramer said.

Wednesday: Lowe’s, Target

Lowe’s: Lowe’s, the main rival to Home Depot, presents its quarterly earnings before the market opens. CEO Marvin Ellison is guiding the home rehab chain through a turnaround.

“Wall Street loves Ellison, though,” Cramer said. “If Lowe’s gets hit, either before or after the quarter, I’d be a buyer of the stock.”

Target: Target comes out with its latest results before trading begins. The stock is about $20 per share off its September high and has a 3.6% yield.

“I know it’s battling both Walmart and Amazon, which might be too much competition for any one company, ” Cramer said. “But I think CEO Brian Cornell’s doing a terrific job. You know what, I like the stock here.”

Thursday: Best Buy, Splunk

Best Buy: The tech gadget store reports earnings in the morning. The stock is up 30% this year, and Cramer is warning not to take a chance on it at current levels.

“I’m betting they’re going to have to talk about tariffs on the whole darned conference call,” he said.

Splunk: The software analytics company, one of Cramer’s “Cloud King” stocks, presents its financial report after the market closes. Cramer expects Splunk to put up a good conference call out of CEO Doug Merritt. He said Merritt continues to deliver on promises.

“I like it a lot. … [It’s got] no China exposure — I say buy,” he said.

Friday: Foot Locker

Foot Locker: The shoe retailer will lay out its quarterly report for investors before stocks start trading. With a presence in shopping centers across the country, Foot Locker carries Nike, Adidas, Under Armour and a range of other sports apparel brands in its stores.

“The stock’s been held back by trade war worries,” Cramer said. “I bet it will prove to be immune, or at least more immune than most people think.”

WATCH: Cramer breaks down the week ahead in earnings

Disclosure: Cramer’s charitable trust owns shares of Amazon.com and Home Depot.

Questions for Cramer?
Call Cramer: 1-800-743-CNBC

Want to take a deep dive into Cramer’s world? Hit him up!
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Questions, comments, suggestions for the “Mad Money” website? madcap@cnbc.com



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Charts suggest markets could soon get a deep correction

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CNBC’s Jim Cramer said Thursday that his colleague is warning that danger could be on the horizon for the stock market.

The “Mad Money” host took a look at chart analysis as interpreted by technician Carolyn Borogen, Cramer’s coworker at RealMoney.com who also runs FibonnacciQueen.com, to understand what could come of this volatile market.

The major U.S. averages were taken for a ride this week as investors attempted to gauge whether the United States would raise existing tariffs on imports from China on Friday. Because of this uncertainty, the best way to get an empirical reading of the market is through studying chart action, Cramer said.

The high-to-high cycles, as explained by Boroden, in the weekly chart of the S&P 500 is cause for concern, the host said.

Highs on the index have ranged between 31 weeks and 36 weeks, and the most recent peak was recorded last Friday, he said. Prior to that, the last major high was set in September, which preceded the stock sell-off in October.

Markets tend to repeat themselves, and because stocks sold off this week after a big run, Boroden thinks there could be cause for concern.

“In fact, she’s looked at a series of previous high-to-high cycles, and what she’s noticed is that there’s a whole confluence of them coming due this month,” Cramer said. “That’s why she’s throwing up a caution flag, because Boroden thinks we might finally get a deep downside correction — even deeper than what we’ve already experienced during hell week.”

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These 6 stocks could make or break the S&P 500’s run

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Call them the Supersized Six.

Microsoft, Amazon, Apple, Alphabet, Facebook and Berkshire Hathaway — six of the most highly valued companies in the S&P 500 — don’t just boast the index’s biggest market caps.

In fact, those six companies are worth about as much as the bottom 290 companies in the S&P combined. Taken together, their market caps total $4.2 trillion, while the bottom 290 S&P companies are worth roughly $4.3 trillion.

It’s fairly common knowledge that the top 50 S&P stocks are worth more than the bottom 450, and it’s not unusual that the market is frequently this “top-heavy,” says Carter Worth, chief market technician at Cornerstone Macro.

But the concentration in these six names is noteworthy, and it could mean trouble for the market, Worth said Tuesday on CNBC’s “Fast Money.”

Considering the influence they have over the S&P’s direction, it makes you wonder: “Is it an index, or is it a few big names that drive everything?” Worth said. “That’s what makes beating the index so hard.”

He called attention to this chart tracking the six-stock basket against its 150-day moving average, as well as the number of times it has traded above or below that average.

“Literally, every single time we have gotten this far above the 150-day moving average, we have peaked. It is right at that level yet again,” Worth said, pointing to the uptick in the bottom panel’s trend line. “So, as this goes, so goes the market. I think you’ve got a crowding that’s not so good. Just to put it in real context, think of those six names relative to the S&P. It’s all so dependent on these big names.”

Moreover, while the market’s “heavy hitters” have made up 15% of the S&P’s total market cap, on average, since at least the 1990s, that percentage is also ticking up, Worth noted.

“We’re starting to get back to a level that is typically indicative of when markets peak. That’s ’07, so forth and so on,” he said. “None of this is particularly healthy.”

By market cap, Microsoft is worth about $963 billion, Amazon is worth $949 billion, Apple is worth $969 billion, Facebook is worth $540 billion, and Berkshire Hathaway is worth $515 billion.

The broader market mounted a recovery Wednesday, with the S&P lifting off its Tuesday lows early in the session.



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