Cannabis stocks tumbled this past week as conventional wisdom floated on the theory that a reversal in the Justice Department’s “don’t ask, don’t tell” marijuana policy sent investors scurrying into a panic. As a litmus of sorts for the sector, MJIC’s North American Marijuana Index, which tracks the top stocks on both sides of the U.S.-Canadian border shed almost 11 percent over a nine-day period following the announcement by Attorney General Jeff Sessions. Having hit a record-high of 343.31 on January 3, mostly a result of the run-up to the inception of California’s adult-use recreational market, the Index plunged by January 12, falling to 306.03. It became hard to ignore the strong correlation between Sessions’ announcement and the steep price-drop hitting the marijuana markets.
Correlation, even a strong one as any kindergartner with an understanding of string theory would say, does not necessarily equal causation. Cannabis analytics group New Frontier Data put that idea into practice on Sunday when they released a statement showing just how little an effect Sessions’ announcement had on the marijuana markets.
“By January 11th,” New Frontier wrote in a statement, “stocks had rebounded to within 5 percent of their value before the Cole Memo was rescinded.”
Further pressing the case this weekend was MarijuanaStocks.com editor Jason Spatafora, known to the Twitterverse as the Wolf of Weed Street. Taking to social media this week, Spatafora blew up twitter recalling a tweet from late December in which he wrote, “Of the 100 #PotStocks I track, 78 of them are green today… I’m anticipating a correction sector-wide, which can be huge for those locking gains, holding/trading a core & have cash waiting on the sidelines… when it happens the bounce will be epic.”
In his follow up tweet Spatafora assessed the current state of the marijuana markets, writing, “And today I have 10 that are green… that’s why you take profit. It’s a #Marathon not a sprint #potstocks.”
“Those who do not learn history…”
While analysts and experts (and, admittedly yours truly) spent the week looking at the market from the lense of the Justice Department announcement, others who have a more long-term understanding of the market mixed with technical know-how were a bit more relaxed during an otherwise seemingly panic. A broad look at the historical data paints a very different picture.
Rather than a panic based on the Sessions announcement, some experts believe cannabis stocks are facing a market correction, one that comes from an easily identifiable pattern to investors with experience in the sector. Again, using MJIC’s North American Marijuana Index as a litmus for the market, two critical pieces of information begin to emerge. The panic following the policy reversal from the Justice Department was a short-term sell-off that immediately corrected itself. More importantly, the current dip in cannabis stock prices is part of a larger pattern that follows periods of industry hype – in this case the opening of California’s adult-use recreational market.
Without delving too much into the technicalities, an examination of recent periods of similar market volatility will help to explain these points.
Taking a look at one of the more recent legalization efforts on the books, Nevada’s adult-use recreational market opened on July 1, 2017. Before the commencement of sales, the Index sat at 108.5. Almost two weeks later the INdex shot up to 120.38, a nearly 10 percent increase. Almost immediately the Index began to dip, or as some might say correct itself from the intense run-up to legalization in the state, eventually falling all the way down to 105.34. The Index fell 14 percent, erasing any gains it made from Nevada’s legalization efforts.
Now compare that to California’s recent legalization efforts, which, keep in mind, were on a much grander scale than what occurred in Nevada. In fact, markets were falling before Nevada went legal, whereas they saw an unprecedented rise before California. Still, a pattern emerges, where before the opening of California’s market, the Index stood at 270.14. The Index went on to peak around January 9 at 362.99 for a 25 percent increase. However, By January 12, the Index was down to 306.03, a dip of 18 percent. Granted what occurred in relation to California happened in a quicker timeline, but the run-up prior happened quickly as well. These are pretty clear patterns of hype followed by a market correction.
The Sessions Panic
Now, many experts will argue that what occurred is a direct result of the policy reversal out of the Justice Department. With U.S. cannabis stocks unable to function on a daily basis without fear of reprisal or worse from the federal government, of course, the market will go into a panic – at least that is the theory.
The critical thing to take away, and it bears out in the data, is that cannabis stocks are not affected by these political pronouncements in any significant way. Sure, the headlines correctly talked about the 24-hour period following Sessions’ announcement where the markets took a 21 percent hit, but they immediately bounced back.
Furthermore, there is another point of reference to compare with this moment. In February of last year, everyone’s favorite Melissa McCarthy impersonator Sean Spicer almost sent the marijuana markets into a panic himself. As Forbes reported, on February 23 Spicer discussed the new administration’s plans to go after marijuana.
“I do believe you will see greater enforcement of it,” Spicer said as reported in Forbes.
Looking at The North American Marijuana Index for Thursday, February 23 it was down to 154.72. However, the Index had already begun to dip one day before Spicer’s comments on February 22, following a ten-day climb. Did Spicer’s comments affect the market? Of course, they did. Were they the primary driver behind the dip at that time? Absolutely not, just like (this writer now realizes) Sessions’ move is not the primary driver behind the current market dip.
So Now What?
Now, investors wait. If the market dips further, it is probably a good time to buy, because these corrections are usually followed by huge upswings. And with each of these corrections, the booms have grown more significant each time. As for the new Justice Department policy, conventional wisdom says the industry is now too big to be brought down, but never underestimate the will of this administration to dig in its heels a little deeper no matter how terrible the outcome for them.