Marijuana stocks are in correction mode once again after surging parabolically to cap another outstanding second half of 2017. It seems as though pot investors go into hibernation in the spring and summer, only to come out in full force in the fall and winter — perhaps to warm up their portfolios with pot stocks?
While it may seem like a unique seasonal pattern has developed over the years, the lack of momentum during the summer is a hype dry-up that’s likely triggered by sluggish trading volumes that usually hit the markets during the summer. Many investors go on vacation and would rather not worry about double-digit percentage movements that come with speculative pot stocks. A 20% decline in one of your holdings is enough to spoil that expensive vacation you’ve been planning for months! Thus, it’s typically a good idea to cash out of such securities before disconnecting for a few weeks or months.
When it comes to marijuana stocks, positive developments usually aren’t enough to fuel a speculative stock’s move to the next level. High trading volumes are required in order to build huge amounts of momentum. And this momentum attracts more volume as the general public becomes fearful over missing out on an opportunity to get rich quickly.
Aurora Cannabis Inc. (TSX:ACB), last year’s hottest pot stock, saw its shares quintuple over the course of a few months in the latter part of 2017, but the party ended quickly thanks to a correction in the U.S. markets.
Although the broader market has begun to show signs of a recovery from the lows of the correction, marijuana stocks have continued to fall, as the February scare was enough to destroy the fragile bubble-like momentum that pot stocks were experiencing.
Sadly for Aurora Cannabis, management finally pulled the trigger on CanniMed Therapeutics after chasing it over the course of many months, right before pot stocks hit their peak. The shareholder-dilutive deal was poorly timed and management is probably kicking themselves, as they could have paid substantially less for the deal if they had been patient and walked away after last year’s parabolic upward surge.
Is it time to take a contrarian position in pot stocks?
Aurora Cannabis shares are down nearly 50% from January’s high, and while they look like a bargain at these levels, it’s worth noting that they’re still up +200% from the peaks of a year ago. If you’re thinking about initiating a contrarian position before a potentially stronger second half of the year, the seasonal effect of higher trading volumes could potentially take a 360-degree turn, biting investors where it hurts: their wallets. If post-legalization numbers fail to live up to the hype, the losses could really begin to accelerate.
We could witness online brokerages fail due to overwhelming trading volumes — a scenario that could see investors be unable to sell their pot stocks even if they wanted to. Thus, it’s ridiculous to think that another second-half parabolic surge will be in the cards just because that’s been the case over the past few years.
If you’re keen on gaining exposure to the marijuana space and you’ve got mad money to speculate, it may be a smart move to initiate quarter positions over the course of the year so the principal you’re looking to put to work won’t vanish in a puff of smoke should things start getting ugly.
Last year, I urged investors to be greedy when others were dumping their pot stocks for no apparent reason, but this year, we could witness a catastrophic “sell the news” scenario play out as we head into the post-legalization era.
Stay hungry. Stay Foolish.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned.