After the close Friday, we learned that the Senate banking committee has scheduled a vote on key cannabis sector banking reform on September 27.
Of course, we do not know that the committee will stick to its schedule. But it is likely, so I will assume that will be the case. This timing suggests a possible course of action for cannabis holdings.
A crescendo in the current rally may arrive on the 27th as the banking committee marks up and approves the bill in question, known as the SAFE Banking Act, short for Secure and Fair Enforcement Act. The bill would give cannabis companies access to bank services like credit cards and financing.
That crescendo may offer an opportunity to exit trading positions, and trim medium-term, multiyear holdings. I always suggest trimming at least some of a position on big moves. I am up around 75% in my AdvisorShares MSOS 2X Daily (MSOX), and 75% qualifies as a big move. I’ve trimmed slightly, and I may trim more on any big rally leading up to, and on, Sept 27.
This is more about position size management than a forecast of weakness. I remain bullish on cannabis stocks as a medium-term hold. Near term, meaning over the next six to twelve months, volatility will be linked to political catalyst flow. I’d buy back on any significant weakness.
Of course, you can decide not to trim, or to sell all if you are an aggressive trader. That is up to you. I’m just giving you a possible timeline, with the standard “sell the news” punctuation point.
Note that this morning we learned Canopy Growth (CGC), not a suggested name, is doing a big private placement to raise $25 million. This is a possible clue that the near-term sector strength might be peaking here, and it probably explains this morning’s weakness in the group. Bankers are not naïve. They often know how to time a top. Also note that the deal was priced a bit below the closing price on Friday, or at $1.09 vs. $1.35. This is also a sign of banker skepticism regarding further strength from here. This move by Canopy is just a clue, not a decisive sign of a top. Bankers are often wrong, too. Watch for more evidence in the form of other financings.
After the 27th there may be a short-term lull in catalyst news flow. Legal experts predict a Drug Enforcement Administration response to the Health and Human Services (HHS) and Food and Drug Administration (FDA) suggestion on rescheduling, around year end. That timing is not a given, but it would be another big catalyst.
Other potential catalysts include the outcome of a recreational use referendum in Ohio this November, and a response from the Florida Supreme Court on the legality of a proposed recreational use referendum there, which could happen at any time, or may not happen at all. If the court decides not to act, the referendum automatically gets approved next April. A leak of the HHS rescheduling letter might also be a mild catalyst.
On SAFE banking, note that the House of Representatives is now controlled by conservatives, so SAFE banking approval there is less likely. But most of the same players are in the House who were there during positive votes on SAFE in the past. So, approval is possible.
What’s hurt SAFE in the past in the Senate was attachments from the left promoting “social equity” goals that were unacceptable to conservatives. This could happen again, though it would seem as if cannabis advocates have learned by now that doing this will scuttle the bill. A possible government shutdown looms by October 1. This, and work on averting it, could postpone a Senate banking committee vote on SAFE. Then there are the normal unknown, unknowns.
What to Do Now
Note that there is reportedly a large short position in cannabis names, purportedly at Canadian hedge funds. This will provide rocket fuel in any upside scenario, if we get a short covering panic. In other words, the group has the potential to remain extremely volatile. I suggest buying weakness in our cannabis stocks and exchange-traded funds (ETFs) between now and Sept. 27, including today. Know whether you are buying for a multiyear hold, for a trade ahead of September 27, or some combination of the two, and act accordingly around any strength leading up to and on September. 27. My two favorite ETFs are MSOX and the unlevered version, which is AdvisorShares Pure U.S. Cannabis (MSOS). My own cannabis positions are mainly multiyear holds, not trading positions, and this is what I suggest you consider.
This is the full portfolio: Ayr Wellness (AYRWF), Cresco Labs (CRLBF), Curaleaf (CURLF), Cronos (CRON), AdvisorShares Pure U.S. Cannabis (MSOS), AdvisorShares MSOS 2X Daily (MSOX), ETFMG Alternative Harvest (MJ), Green Thumb (GTBIF), Organigram (OGI), Tilray Brands (TLRY), Trulieve (TCNNF) and Verano (VRNOF).
There’s no guarantee that strength will happen around September 27. It seems like the most obvious course. But the market has a funny way of not doing what is obvious, maybe because it seems to like to fool as many people as possible at any given time, and the crowd is likely to be bunched up in the “obvious” scenarios.
