Most Tier-3 Cannabis Juniors Have Run
One of the most reliable predictors of short/intermediate cannabis sector tops resides in the trading activity of the Tier-3 juniors. The money almost always flows to the top first, filters down to the mid-majors, and eventually the juniors once larger cap upside movement gets too constrained. And right now, we’re at the point where most of the speculative LPs have participated in this Canopy Growth-inspired run...The most telling aspect that this bull run is getting ultra-mature is that some deep Tier-3 players have really begun making their move. More speculative LPs such as MYM Nuctraceuticals Inc., currently higher by $0.30 to $1.34/share (↑28.85%), are taking off sans material news. This is a tell-tale sign that pervasive FOMO has entered the market.
That’s certainly not the ideal time to deploy fresh investment capital in the sector.
Pre-Labor Day Weekend Coming Up
As we’ve elucidated repeatedly, the cannabis market—in its current iteration—is almost exclusive news-driven on a macro level. That will change of course, in the coming quarters as the market gradually shifts towards revenues/earnings discount metrics. If this wasn’t entirely clear, the Canopy Growth-Constellation Brands equity integration certainly cleared that up. Has anyone talked about WEED’s quarterly earnings, released concurrently to the deal?
Belying the fireworks we’ve seen lately, I believe there’s a good chance the news cycle will be relatively tame next week. Traditionally, the last week of August is one of the market’s quietest periods, as investors take extra days off to extend vacation times. In Canada, many people consider the Labor Day long weekend as the “unofficial” end of summer, and generally take advantage of the great weather by doing things other than work. That’s a generality of course, but a truism nonetheless.
While the lack of activity could theoretically limit downside activity as well, at these levels, the onus is on bulls to maintain momentum—not the other way around. It will be a tough task to keep prices marching higher—or even remain at a standstill—if both volume and news can’t remain in hyperdrive.
Final Thoughts
Again, I don’t expect this article to win any popularity contests. Shareholders and insiders are making money, and few investors want to see this cannabis sector bull run come to an end. This projection may be slightly ahead of its time, as most technicals remain in resolutely-bullish territory. If this is the long-awaited industry consolidation moment everybody has been waiting for, who knows how much price extension remains.
But for the reasons mentioned above, I believe sector consolidation is likely on the doorstep. With record (or near-record) on-open buying in both Canopy Growth and Cronos Group—right at (or near) overbought levels—the next FOMO is likely nearing the profit-taking side of the equation. We also saw Aphria smash its all-time volume high (23.1 million shares!) on news that was already semi-known on Bay St. Both of these scenarios reek of near-peak FOMO, although there may be cause for Aphria to rally further.
The Midas Letter congratulates all investors who profited from this historic cannabis sector run—wherever it may end. Barring an imminent major Canadian LP purchase by Big Alcohol, I believe the pause button will be pressed early next week. For a market in serious need of consolidation, that’s a positive development.
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