The volume of declining weed stocks decreases with the introduction of new legislation

Cannabis shorts hit two-year low – Photo: Shutterstock

A steady and dramatic decline in short-term interest, combined with headline-grabbing legislative advances in the US Congress, has supported cannabis stocks over the past week. But despite the positive vibes surrounding the holy grail of federal legalization, investors shouldn’t expect the issue to be resolved until November’s midterm elections and a potential reversal of power in the US legislature. .

ETFMG Alternative Harvest ETF (NYSE: MJ) 2020-YTD

ETFMG Alternative Harvest ETF (NYSE: MJ) 2020-YTDETFMG Alternative Harvest ETF (NYSE:MJ) 2020-YTD – TradingView

I am amazed at this short interest [in cannabis stocks] has gone from $2 billion to $3 billion a few years ago to less than $1 billion now,” said Ihor Dusaniwsky, managing director of S3 Partners, Predictive Analytics, although the sector’s short selling is a profitable position in 2022.

Despite the industry benchmark ETFMG Alternative Harvest ETF (NYSE: GM) gaining as much as 8.93% last week at $6.37 per share, it was down another 48% in value year-to-date to open Monday at $6 per share. The ETFMG Alternative Harvest ETF, which trades on the NYSE under the symbol MJ, tracks 41 stocks trading on US and Canadian exchanges focused on the legal marijuana industry.

ETFMG Alternative Harvest ETF Price Chart (NYSE: MJ)

Constantly declining short interest

Short-term interest in the cannabis sector fell to $632m (£525m), from $1.57bn to start the year and $3.14bn in May 2021, in a research report last week. Short-term interest focuses on a small number of companies. With the top 20 shorted weed stocks accounting for 97% of total short interest in the sector, and only two stocks – Canopy Growth (GCC) and the Tilray brands (TLRY) – representing 57% of this total.

Canopy Growth Corp. (NYSE: CGC) 2020-YTD

Canopy Growth Corp.  (NYSE: CGC) 2020-YTDCanopy Growth Corp. (NYSE: CGC) 2020-YTD – Photo: TradingView

S3 Partners tracks 163 stocks of 100 US and Canadian cannabis companies, some with stocks traded in both jurisdictions. S3 reports that short sellers are not actively replacing their short exposure. Short-term interest in cannabis stocks has declined by $1.89 billion since February 10, 2021, by $1.04 billion in 2022 and by $153 million in the past 30 days.

“Short hedges in the cannabis sector have accelerated recently, which I would attribute in part to the possibility that legislation will go further than in the past,” Dusaniwsky added. “I can’t imagine investors being oblivious to the fact that the legislation is unlikely to pass. On a smaller scale – the market is a forward-looking mechanism – while it seems more likely that legislation will pass in the near term, stock prices should be supported somewhat by the more positive sentiment.

New Cannabis Legislation Introduced

Indeed, U.S. Senate Majority Leader Charles Schumer (DN.Y.) introduced the highly anticipated Cannabis Administration and Opportunities Actwhich aims toend the federal ban on cannabis by removing cannabis from the Controlled Substances Act. But without the full support of the Democratic Party in the equally divided U.S. Senate, the chances of the bill passing remain slim.

Tilray Brands Inc. (Nasdaq: TLRY) 2020-YTD

Tilray Brands Inc. (Nasdaq: TLRY) 2020-YTDTilray Brands Inc. (Nasdaq: TLRY) 2020-YTD – Photo: Shutterstock

The votes are clearly not there for comprehensive reform,” noted Morgan Fox, political director of the National Organization for the Reform of Marijuana Law (NORML), an industry lobby group. “But the votes are for incremental reform, and we now have the opportunity to make that happen and make it bigger than previously thought.”

In addition to Sen. Dianne Feinstein (D-California) who has long opposed marijuana law reform, Sen. Jon Tester (D-Mo.) opposes federal legalization, despite a strong balance sheet to vote for pro-marijuana law reform because federal law would replace the legal cannabis industry in the entire state of Montana.

Additionally, US President Joe Biden, a Democrat who has long opposed federal marijuana legalization, remains a wild card, whose signature would ultimately be required for any bill to become law.

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“It’s a long game”

“The banking language of this bill provides a solid blueprint of what would be needed to get Democrats [Party] support for incremental reform with slightly limited social justice reforms, but whether that’s a bridge too far for the GOP remains to be seen. Added Norml’s fox. “Although we should be careful not to go overboard or risk losing a much needed GOP [Republican] Support.”

When it comes to the cannabis sector, expect more volatility as legislation is introduced but ultimately fails to get the votes needed to get out of Congress. the president to sign if necessary. And if Democrats fail to hold both houses of the U.S. Congress after the midterm elections, the odds that a bill will pass drastically diminish.

They always have [rise], then let it go,” when new cannabis legislation removes a legislative hurdle, Fox added. “Because investors and traded companies don’t understand it’s a long game.”

Further reading:

Financial stock market graph.  3d illustration
ROSTOV-ON-DON / RUSSIA - March 1, 2020: Tilray logo on smartphone screen

About Michael S. Montanez

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