In today’s Marijuana Market Update, I discuss the recent uptrend in cannabis stocks and tell you if it will last. Could a new cannabis legalization bill actually pass?
Cannabis Stocks Soar
Cannabis stocks moved upward to start the week.
Upward isn’t a word we’ve used to describe the cannabis market for a while.
This chart shows some of the bigger movers in the space on Monday.
Major players Canopy Growth Corp. (Nasdaq: CGC) and Aurora Cannabis (Nasdaq: ACB) were the biggest movers, up 15.6% and 5.1% at Monday's close. CGC jumped another 17% by Wednesday's close.
For CGC, it was the largest intraday jump since February 2020.
It marked the biggest single-day gains for cannabis stocks in the last 52 weeks. Why did this happen?
Why Cannabis Stocks Jumped
One reason is that cannabis stock short sellers have wound down their bets since May 2021.
According to S3 Partners, short-sale interest in cannabis stocks was $3.14 billion in May 2021. That's dropped to $632 million as of Monday's close.
That's an 80% drop!
On the other side of the coin, speculators have started to dump money into cannabis stocks.
And it's all thanks to a potential development on the cannabis legalization front.
Source: Marijuana Moment.
Last week, a leak revealed a bill to legalize cannabis on the federal level.
Senators Chuck Schumer, D-N.Y., Ron Wyden, D-Ore., and Cory Booker, D-N.J., expanded on a draft from last year to create the new Cannabis Administration & Opportunity Act (CAOA).
And it looks like the bill could hit the Senate floor for a vote after the three filed the CAOA on Thursday, according to Marijuana Moment.
What to Know About the New Cannabis Bill
Here are some of the biggest changes within the CAOA:
- The bill would remove cannabis from the Controlled Substances Act.
- It would add a federal tax on cannabis sales.
- And it would provide some kind of relief for people convicted of federal cannabis crimes.
But cannabis stocks still have a lot of losses to reclaim — even with the recent momentum.
The four biggest cannabis exchange-traded funds (ETFs) are way down this year.
The AdvisorShares Pure Cannabis ETF (NYSE: YOLO) and the Cannabis ETF (NYSE: THCX) are down more than 50% for the year.
The ETFMG Alternative Harvest ETF (NYSE: MJ) has lost 42% of its value, while the Cambria Cannabis ETF (CBOE: TOKE) is off 31% since the start of 2022.
That is the story for cannabis stocks across the board.
Bottom line: There’s a long way to go for cannabis stocks still.
And I’m not sure this recent positive momentum is sustainable.
Don’t Bank on the Cannabis Bill
Conventional wisdom suggests the move to bring this bill to the floor is nothing more than Schumer fulfilling his promise to do so.
The CAOA needs 60 votes to pass the Senate. With Democrats holding 50 seats, it needs bipartisan support to pass.
Most Republicans are opposed to legalizing cannabis, especially if any part of the bill includes a tax to help with social equity such as funding programs for communities that have been harmed by marijuana prohibition.
On top of that, some Democrats have already opposed the initial draft language. We don’t know if the new bill addresses those concerns.
Schumer said the bill’s writers have worked with several bipartisan offices, advocacy groups and cannabis stakeholders to move the bill in the right direction.
But I think this is pie in the sky over reality.
Senate Democrats have their backs against the wall as the August recess approaches.
Following the break, the midterm election cycle will shift into high gear. There is fear that Democrats could lose their slight majority in the chamber.
If they want to pass a new cannabis bill, now is the time to do it.
And those prospects look slim at the moment.
Bottom line: I think this new momentum in cannabis stocks is temporary, as investors trade on headlines rather than reality.
That's all for me this week.
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Safe trading,
Matt Clark
Research Analyst, Money & Markets
