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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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Charts show steady investor optimism, more upside for stocks

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The stock market rally that began 2019 has not yet run its course, even with Tuesday’s Washington-induced surge, CNBC’s Jim Cramer said after consulting with technician Carley Garner.

“The signs suggest that this market can have more upside before the rally exhausts itself,” Cramer recapped on “Mad Money.” “Eventually the market will become too optimistic and stocks will peak, but we’re not there yet.”

Garner, the co-founder of DeCarley Trading and author of Higher Probability Commodity Trading, has an impressive track record. In mid-December, one week before the Christmas Eve collapse and subsequent rebound, she told Cramer that pessimism was peaking and stocks were due for a bounce.

But now that the S&P 500 has gained over 15 percent since those midwinter lows, it’s worth wondering the reverse: what if optimism is approaching its peak?

Lucky for Wall Street, Garner says it’s not. She called attention to CNN’s Fear and Greed index, which uses a variety of inputs to measure what CNN sees as investors’ chief emotional drivers.

Right now, the index sits at 67 out of 100, signaling more greed than fear, but still “a far cry from the extreme levels where you need to start worrying,” Cramer explained. When the major averages peaked going into the fourth quarter of 2018, the index hit 90, and according to Garner, “we usually don’t peak until we hit 90 or above,” he said.

Add to that the fact that only half of professional traders and investors polled for the most recent Consensus Bullish index said they felt bullish; the recent downtrend in the Cboe Volatility Index, which tracks how much investors think stocks will swing in the near future; and that, historically, this is a good time of year for stocks; and Garner sees more momentum ahead.

The S&P 500’s technical charts seem to uphold Garner’s theory. Its weekly chart shows fairly neutral readings for two key indicators: a momentum tracker called the Relative Strength Index and the slow stochastic oscillator, which measures buying and selling pressure.

“Even if the S&P 500 keeps climbing to, say, … 2,800 — up 2 percent from here — Garner doesn’t anticipate either the RSI or the slow stochastic [to] hit extreme overbought levels,” Cramer said, adding that the technician could even see the S&P climbing to 3,000 if it breaks above the 2,800 level.

If Garner is wrong and the S&P heads lower, she said it could trade down to its floor of support at 2,600, and if it breaks below that, fall to 2,400. But that scenario is highly unlikely and, if it happens, would be a buying opportunity, she noted.

The S&P’s monthly chart told a similar story, Cramer said. The index is currently trading at 2,746, between its “hard ceiling” at 3,000 and its “hard floor” of 2,428, he said, which means it’s “basically in equilibrium.”

“To Garner, that means going higher is the path of least resistance for the S&P,” the “Mad Money” host said. “Once the S&P climbs to 2,800, or perhaps … to the mid-2,900s, that’s where Garner expects things will turn south and the pendulum will start swinging in the opposite direction.”

“Remember, … Carley Garner has been dead-right, and the charts, as interpreted by Carley, suggest that this market still has some more upside here,” Cramer continued. “But if we get a few more days like this wild one, she thinks we’ll need to start worrying about irrational exuberance. For now, though, she thinks we are headed higher, and I agree.”



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What Jeff Bezos’ private life means for investors

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Daniel Ek, chief executive officer and co-founder of Spotify AB.

Akio Kon | Bloomberg | Getty Images

Daniel Ek, chief executive officer and co-founder of Spotify AB.

Cramer said Wall Street has misread Spotify‘s latest earnings report and guidance, and that misunderstood stocks like these give investors an opportunity to make some money.

he called out stock analysts like Everscore ISI’s Anthony DiClemente who have downgraded the equity over concerns about subscriber growth.

“I think this is lunacy,” said Cramer, who has been bullish on the music streaming platform since it went public last April. “It’s like the market just doesn’t know how to read this company or its quarterly guidance. In my view, Spotify is very much on the right track.”

The stock was rocked after a seemingly mixed quarterly earnings released Wednesday, Cramer said. After Spotify reported lower-than-expected sales, tight cash flow and conservative guidance across the board including subscriber growth, shares sold below $129 at one point in Thursday’s session.

But Cramer noted that the company beat expectations on operating profit and gross margin, which was 120 basis points higher than was asked for.

“I think the sellers were missing a lot of context here and the context is something I like to talk about a lot and it’s called UPOD. They under promise … and then they over deliver,” he argued. “At this point, CEO Daniel Ek and his team have established a track record of giving cautious guidance—under promise—and then beating it—over delivering.”

Spotify’s guidance includes planned investment costs and the company could “become the premier platform for podcasts,” a hot market for hard-to-reach millennials, Cramer said.

Click here to read Cramer’s full take.



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Charts show investors ‘can afford to be cautiously optimistic’

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Investors can afford to be “cautiously optimistic” at this point in the stock market’s cycle, CNBC’s Jim Cramer said Tuesday after consulting with chartist Rob Moreno.

Moreno, the technician behind RightViewTrading.com and Cramer’s colleague at RealMoney.com, sees a convoluted path ahead for stocks. After calling the December bottom, Moreno noticed that the Nasdaq Composite’s late-2018 decline was about a 24 percent drop from peak to trough.

That’s important because, in a bull market, stocks tend to see “periods of consolidation — pauses in a long-term bull run,” Cramer explained. “To [Moreno], the decline here looks very similar to what we saw from the Nasdaq in 2011, 2015 [and] 2016,” three consolidation periods of recent past.

If he’s right, that could be bad news for the bulls, who may have to wait at least seven months for stocks to break out of their consolidation pattern, during which they tend to trade in a tight range, Cramer warned. But Moreno still sees some opportunity for investors.

“If you believe his thesis about the market — that we’re in a consolidation period, one that will last until September — then you can afford to be … cautiously optimistic right now,” Cramer said on “Mad Money.”

Part of Moreno’s confidence came from his analysis of the S&P 500’s daily chart, which also included the support and resistance levels from its weekly and monthly charts.

Even after a 16 percent rally from its December lows, Moreno saw more room to run for the S&P based on its Relative Strength Index, or RSI, a technical tool that measures price momentum. The RSI, he explained, hasn’t yet signaled that the S&P is overbought, and the Chaikin Money Flow, which tracks buying and selling pressure, shows big money pouring in.

“Moreno thinks that these new buyers are the kind of investors who won’t be panicked out of their positions by short-term volatility,” Cramer said, adding that the technician sees about 3.5 percent more upside for the S&P before it hits its ceiling of resistance at 2,818.

But if the S&P manages to trade above its ceiling of resistance and return to its October highs, Moreno expects a “synchronized reversal” in the stock market that could crush the major averages, the “Mad Money” host warned.

“At least until September, Moreno says you should be a seller if the averages approach their October highs — that’s around 2,930 for the S&P 500,” Cramer said. “Eventually he expects a breakout from these levels, but it won’t happen any time soon.”

So, what’s the right move for investors? According to Moreno, not all is lost. He still expects to see strong gains — a roughly 7.5 percent move — before the current rally peters out. But he doesn’t want buyers to get too trigger-happy, especially considering the months of sideways trading he’s predicting for 2019.

“Until [September], he expects the market to trade in a fairly wide range, with the S&P bouncing between 2,350 and 2,930. For now, we’re headed higher, but he says you should use these key levels as entry and exit points until the consolidation pattern finally comes to an end later this year and the averages resume their long march higher,” Cramer said. “Even if he’s right and this rally will lose its steam after another 7.5 percent gain, that’s still pretty good, but I am very wary and it makes me want to do some selling after this run.”



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