Charting Man Dan McDermitt on Today’s Market Movers in Cannabis Space

Charting Man Dan McDermitt discusses how weakness in the S&P500 is still causing weakness in the cannabis sector. He suggests that daily trend changes need to show a shift in momentum to catalyze a reversal from a technical perspective. McDermitt addresses why the Altria Group Inc (NYSE:MO) deal with Cronos Group Inc (TSE:CRON) (NASDAQ:CRON) (FRA:7CI) did not act as a sector catalyst to the same degree as the Constellation Brands, Inc (NYSE:STZ) agreement with Canopy Growth Corp (TSE:WEED). He notes that while the Constellation deal raised all boats, the market has begun to price in these moves and argues that Aurora Cannabis Inc (TSE:ACB) has risen 7 percent since the Altria news because the market is pricing in a similar deal for that company. Charting Man Dan runs through how several cannabis companies have recovered since the Aphria Inc (TSE:APHA) report last week and highlights how the Farm Bill is acting as a short term catalyst for American cannabis stocks.

Transcript:

James West:   Welcome back. My guest in this segment, as he is every Tuesday, Dan McDermitt, Charting Man Dan with the thechartguys.com. Dan, welcome back to the show.

Dan McDermitt: Thanks for having me, James. Great to be here.

James West:   So let’s start a bit about what’s moving the markets around today from a technical perspective. Certainly there’s been nothing but weakness in the cannabis sector generally, but that’s a reflection, I think, of markets, the broad market globally. Is that what you would sort of see from where you sit?

Dan McDermitt: Definitely. It’s always the S&P 500 recently that we are watching as Step #1 to get a gauge of what the market is doing, and it’s still weak. Every little bounce is just a lower high, we still have uncertainty with Trump and China, and again, it’s always a joke where, you know, you have the Canadian sector as its own little universe, but the Canadians in our chat room sort of unfortunately now have to pay attention to Trump and, you know, all of these tweets that he’s sending out.

So the bottom line is, yes, we are still weak in the S&P 500, and yes that is still causing weakness in the MJ sector.

James West:   Okay, so what’s going to catalyze a reversal, and do you see that happening anytime soon?

Dan McDermitt: Well, fundamentally, what would be a great start would be an inked deal between China and the US, and get rid of all this market uncertainty. The market certainly is not enjoying that uncertainty. That would be a fundamental reason.

As far as technically speaking, we just need a change in the trend on the daily time frame, which is market by higher lows and higher highs, and we’re just not anywhere near seeing that at this point. So patiently waiting for daily trend changes to show a shift in momentum from weakness to a little bit of a bounce.

James West:   Right, okay. And so, it was interesting to me that the macro-catalyst of Cronos Group receiving the investment from Altria, you know, an over $2 billion investment, didn’t really catalyze a sector-wide lift like the $5 billion investment by Constellation did into Canopy. Why is that?

Dan McDermitt: Well, what the market does is, it’s really smart, and it prices things in. so the reason that Canopy was such a big deal is, it was the first one in the sector. So that’s everybody saying Oh, wow, this is legit, we’re going to see real companies come in now. And so then, everybody raises up. All the tides raise all ships.

So now we had Cronos, and it’s a little bit of a lesser reaction, and yet again, everybody gets raised up. So Aurora, who doesn’t have a deal yet, they saw a 7 percent response that day. So that’s the market pricing in that Aurora is eventually going to get a deal. So I anticipate that the next deal that we get from a major company, if it’s in line with what we’ve seen in the past, it’s going to get even less of a reaction, because the market has been pricing in that these deals are coming now for the last month-plus and however long that we’ve been getting them.

So I think it’s just a little bit of a lesser effect each time we get this news.

James West:   Mm-hmm. Okay, so technically, heading towards the end of the year, what’s in store for cannabis investors? More continued weakness going into the New Year, or do you think there will be some kind of reversal to the upside?

Dan McDermitt: I’m keeping an eye out for a short term bounce, which would last maybe a week or two; it wouldn’t change the long-term weekly trend, it would just set a lower high on the weekly time frame, and I’ll point that out here in just a moment. But other than that, it’s not looking like we’re just going to see – obviously, we’re seeing a lot of disheartened people out there. And again, like you said, the fact that this Cronos deal was not a catalyst, and that’s going to further dishearten people. So we have to go through the emotional cycles in the market cycles, and it’s going to reach a point where everybody’s bummed and everybody’s bored and things are slow, and that’s when we’ll start to shift that psychology and momentum in the other direction.

James West:   Okay. Before we get to the charts, any macro-catalysts out there on the horizon that you see that might be a sector-wide raising of all boats?

Dan McDermitt: Aside from Federal changes in the US that would obviously impact the US sector the most, but Canadian sector would definitely get an impact, as well; that is the golden goose egg of what the market could be looking for right now, would be Federal US changes in laws.

James West:   Sure. Okay, and why don’t you walk us through the chart now?

Dan McDermitt: So here what I’m looking at is CGC on the weekly time frame, and when I was talking about the possibility to see a couple-week bounce, CGC can get anywhere all the way up until 46.74 and still just form a lower high. So we’re not going to change any kind of trend. We could see a 20 percent bounce, and still just form a lower high. There is a possibility, you know, heading into the New Year, for a short term bounce, but again, without any kind of significant catalyst, it’s going to take a long time for these trends to shift, and what we’re essentially going to have to see is a move up, set that lower high, pull back for a higher low, and then the higher high would change the trend.

So that’s going to take weeks and weeks to play out without some quick catalyst to do the work for the bulls.

So what I want to talk about now is, what I look at when I’m comparing individual names. You know, who’s stronger in the sector, and who’s weaker. And we just had the recent news event with Aphria, with the whole short scandal, and that is a date that is important to me – December 3^rd – because that’s the date where the vast majority of individual names saw weakness. And we pulled back very hard from that.

So what I want to know is, who is still below the December 3^rd high, and who has fully recovered and is above that level right now?  And we can see that CGC is nowhere near breaking its December high, so it’s a bit weaker than everybody else, and when I go through and compare it to other individual names, and I see the December 3^rd high of $7.87 on the Canadian side of things, and here we are breaking that level today. So we’ve made a V-shaped recovery, we’ve taken back that weakness that we saw in correlation to that Aphria short piece, and that’s a recovery.

And what I’m also noticing is that the vast majority of US names are seeing that recovery as well. Here’s NBEV, NBEV, we have an up-trend here. This is a month-long uptrend of daily higher lows and higher highs, and we don’t have many names in the sector that have such a clear uptrend, and certainly not on the Canadian side of things. But NBEV is showing a lot of strength. We’ve got CWEB with a  V-shaped recovery back over the high of December 3^rd. we’ve got IAN also over the high of December 3^rd with a V-shaped recovery, and KSHB is another one that has an uptrend and is topping out a little bit of resistance, but the bottom line is seeing an uptrend again stands out in such a weak sector right now.

So I’m comparing individual names to where we stood the day the bad news came for Aphria, and here’s Aphria right now, here’s that gap-down day on December 3^rd, and Aphria is still trying to make its own recovery. But the bottom line is, I’m seeing more strength in the US side of things than the Canadian side of things, that can be potentially attributed to the Farm Bill. And what’s interesting about the Farm bill in the US is, it’s not this kind of singular news event. Like, you know, we get a news release that there’s a deal with CRON, and that’s set in stone; whereas this is sort of, you know, inching the can down the road a little bit. We get word that there’s an agreement reached, and then we get someone signing the bill, and then it has to eventually go on the desk of the President to sign.

So we price it in piece by piece rather than all at once with a big gap of open, but I do believe that that’s the short-term catalyst that is pushing the US MJ names a little bit stronger than the Canadian names.

James West:   Okay. So, what exactly is the nature of that catalytic force in the Farm Bill? What is it going to go for the valuation of US operators?

Dan McDermitt: Well, it’s going to open it up Federally to be legal for industrial hemp in the United States, which hasn’t happened in, you know, 90 years, since it’s been made illegal, and that’s essentially just going to open the door for expansion.

The next major catalyst that I’m looking for is for marijuana to be removed from Schedule 1, because that’s going to open the door for the banks to get involved, and then we’re going to be able to see, you know, significant funding in these companies to allow for that expansion of operations.

So there are certainly companies that are operating with their industrial hemp in individual states that have already legalized; this just opens the gates in terms of expansion and, you know, where your target market can be, spread around the country, or where your operations are spread around the country. So it’s not, you know, the Holy Grail, but it is definitely a step, and it’s also going to incite the confidence in the US investor that, Okay, we actually are getting government changes. Government can certainly be slow and long and drawn out, but changes are happening, and that’s going to make us see people get excited for de-scheduling and get excited for potentially seeing some further longer, major changes in the marijuana space in the United States.

James West:   Sure. Do you think that there’s a risk that the Federal de-prohibition or ratification of CBD regulation is going to catalyze a supply side surplus resulting in price competition?

Dan McDermitt: Oh, I’m sure it is. Right now, CBD is definitely very expensive, and I do expect prices to drop as supply does increase, and we’ll reach an equilibrium of prices eventually. I don’t think it’s going to happen anytime soon. The same way we will with cannabis; you know, prices are going to drop as people get better at producing it, and their prices drop as well. So it’s something to be aware of, longer term, absolutely. And that’s where a lot of people feel that the MJ companies that have value-added products are the ones that are going to be surviving, not the ones that are potentially, you know, just growing the bud, but the ones that are turning it into edibles or turning it into concentrates and all these other products. That’s where a lot of people see the potential profit margins.

James West:   Okay, so coming back to your observations about the companies that have fully recovered versus those that are still trying to stage recovery, do you think that the – like, Charlotte’s Web, for example, has staged a full recovery, so that it’s recovered all of its lost ground. Does – and you say that that might be in part driven by the Farm Bill. Do you think that as we inch closer to the Farm Bill that these US names will continue to outperform that have big exposure to CBD products?

Dan McDermitt: I do believe that that is a potential short-term catalyst to continue outpacing Canadian MJ names to a certain degree, but it also gets to the point where it gets priced in. so we know that the Farm Bill is most likely going to get signed, and the market is really good at reacting to what’s most likely to happen. So when it actually does happen, and we’re actually finally seeing it signed by the President and it’s the real deal, I don’t expect any kind of significant bullish reaction, because each step of the way, it’s been priced into in the market.

James West:   Right. Okay, Dan, well, fascinating as usual, really appreciate your input, and we’ll talk to you soon. Thanks for joining me.

Dan McDermitt: Thanks James, have a good one.

Original article: Charting Man Dan McDermitt on Today’s Market Movers in Cannabis Space

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