Many investors see a big opportunity in marijuana.
Alas, it is not as simple as buying a handful of marijuana stocks on good news. Often it backfires and investors lose money on the ensuing volatility. When I wrote “How to potentially become a marijuana millionaire, albeit carefully,” the most important word in the headline was “carefully.”
Sen. Cory Booker, a Democratic presidential candidate, is reintroducing a bill that would legalize marijuana at the federal level. Four of his fellow presidential candidates, Sen. Elizabeth Warren, Sen. Kirsten Gillibrand, Sen. Kamala Harris and Sen. Bernie Sanders are cosponsoring the bill.
Martha Stewart is teaming up with Canopy Growth CGC, -0.76% to develop and market a line of CBD products. The Arora Report previously identified Canopy Growth as the top pick in the marijuana space. Please see “If you buy only one marijuana stock, this should be it.”
This is good news. The long-term future for marijuana stocks is bright. Then why not back up the truck and buy marijuana stocks as a long-term investment? Also, what should you do with the marijuana stocks you own now? Should you trade them for short-term gains? Let’s explore with the help of a chart.
Chart
Please click here for an annotated chart of Cronos CRON, +0.32% Please note the following:
• The Arora Report gave a buy signal before the runup. The buy signal is shown on the chart. Cronos is one of the eight stocks in The Arora Report’s marijuana portfolio.
• The chart shows RSI (relative strength index) divergence. In plain English, this means that as the price has gone higher or continued to levitate higher, RSI has gone down. Since RSI is not yet oversold, this situation is interpreted as a high-risk situation.
• The chart shows that a big part of the rise has been a short squeeze, according to the algorithms at The Arora Report. In a short squeeze, investors who previously sold short are either forced to buy to cover their shorts or feel compelled to buy to cover at higher and higher prices. Such buying is artificial buying and not buying based on fundamentals. In the stock market, there are not many things we know with certainty. However, we know with certainty that short squeezes eventually end. When they end, the stocks fall.
• The chart shows the Arora signal to hold core positions but take partial profits on the rest.
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Winners and losers
Some will make millions in marijuana stocks, but many more will lose their shirts. Here is what will separate the winners from the losers.
• Winners respect risk. As shown on the chart, there is high risk in Cronos stock now. Somewhat similar conclusions can be drawn from the charts of Tilray TLRY, -2.21% Aurora ACB, -2.91% Aphria APHA, -2.12% and marijuana ETF MJ, +0.08%
• Winners buy on pullbacks for the long term.
• Winners hold core positions and surround them with trade-around positions. Core positions are for the long term. Trade-around positions are for the shorter term. In view of the good news from the five presidential candidates and Martha Stewart, The Arora Report just gave a signal on a trade-around position on a popular marijuana stock.
• Winners keep tight risk control on trade-around positions.
• Winners give more wiggle room to core positions.
• Winners master the position size.
• Winners master the science of scaling in and scaling out.
• Winners focus on special situations even when marijuana stocks are very risky. Examples are CBD coffee and a CBD arthritis gel.
• Winners learn to gain as many edges as they can.
• Winners learn to short-sell.
The big edge
Please click here to see segmented money flows on 17 popular marijuana stocks. These include New Age Beverages NBEV, +0.34% MedMen MMNFF, -2.31% Curaleaf CURLF, -3.80% and Acreage ACRGF, -2.85%
Segmented money flows give you the biggest edge. They help you not only make money but also stop you from becoming bag holders at the hands of insiders and pump-and-dumpers. To learn about segmented money flows, please see “These three marijuana stocks are rising in popularity.”
As of this writing, money flows show that the momo crowd is aggressively buying marijuana stocks. However, the smart money is not buying and even selling on up spikes.
What to do now
If another short-squeeze leg starts, consider starting trade-around positions with tight stops.
Those who are aggressive and holding marijuana stocks may consider continuing to hold core positions but take partial profits on the rest.
Those who are holding positions larger than the core positions or trade-around positions may consider taking partial profits.
Those who are growth-oriented and holding marijuana stocks may consider trimming core positions at the edges by taking partial profits on any up moves.
Those not in marijuana stocks may consider waiting patiently for signals to buy popular marijuana stocks but buy new special situations now.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.