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The real reason marijuana stocks are falling off a cliff -- and what to do now

11:54 AM ET 10/23/18 | MarketWatch

The real reason marijuana stocks are falling off a cliff -- and what to do now

By Nigam Arora 

Amateur investors are panicking, even as select stocks are now coming into buy zones 

I have been getting a lot of emails from marijuana investors who are trying to understand the real reason behind share prices falling off a cliff. It is never easy for investors when the stocks they are holding fall precipitously. 

On the positive side, you are seeing the first pointer given in "How to potentially become a marijuana millionaire, albeit carefully (https://www.marketwatch.com/story/how-to-potentially-become-a-marijuana-millionaire-albeit-carefully-2018-08-27)" coming into play. Astute marijuana investors will take advantage of the drop and may end up making money in the long run. Let's explore the real reason for the decline in marijuana stocks with the help of a chart. 

The chart 

Please click here (https://thearorareport.com/chart-money-flows-cannabis-stocks-10232018) for the updated chart showing money flows in marijuana stocks. 

-- At The Arora Report, we address marijuana every day before the market opens in the Morning Capsule. From the Morning Capsule: "We have been sharing with you that marijuana stocks are high-beta stocks. In plain English, this means that they move a lot. The momo (momentum) crowd is aggressively selling marijuana stocks. Overall, smart money flows are negative but on down spikes there is light buying from smart money in select marijuana stocks." 

-- It is important to understand the most important concept: Marijuana stocks move based on what happens at the margin. At the margin, there are two kinds of players: smart money and momo. The chart above separately shows momo money flows and smart money flows. We have been sharing with you for a while that the smart money has been selling marijuana stocks into the strength. We also gave a signal to sell trade-around positions in marijuana stocks at the top. 

Until recently, buying by the momo crowd was much stronger than selling by the smart money. In a prior Morning Capsule, we said: "A big difference from the past is that the momo crowd is not aggressively buying marijuana stocks." 

Since there was no momo crowd buying, selling from smart money initially drove marijuana stocks down, but not by a lot. Then the momo crowd panicked and started aggressively selling. With both momo crowd and smart money selling, there were several technical breakdowns. A lot of money is tied to technical trading on Wall Street. Such money started selling on technical breakdowns, making the drop worse. 

-- Smart money flows are only mildly negative in Aurora Cannabis and Canopy Growth (WEED.T). 

-- Smart money flows are extremely negative in Tilray and marijuana ETF (MJ). 

-- Smart money flows are negative in Aphria , Cronos (CRON.T), Neptune (NEPT.T) and New Age Beverages (NBEV). 

-- In marijuana-related stocks, smart money flows are negative for GW Pharmaceuticals (GWPH), Scotts Miracle-Gro (SMG) and Constellation Brands(STZ). 

-- Smart money flows are neutral in Green Organic Dutchman Holdings . 

Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora (mailto:[e-mail]). 

The first pointer 

The first pointer given in How to potentially become a marijuana millionaire, albeit carefully (https://www.marketwatch.com/story/how-to-potentially-become-a-marijuana-millionaire-albeit-carefully-2018-08-27), is to expect these stocks to be very volatile. Here is the second pointer: "Investors may want to take advantage of the volatility by selling into the strength and buying into the weakness." 

Select stocks are now coming into buy zones. The stocks that come into the buy zones may be accumulated by slowly scaling in. In contrast, other marijuana stocks should be sold and even sold-short (betting on a decline). 

Investors may want to take advantage of the technique we often use at The Arora Report to double returns and lower risks. In this technique, core positions are built by scaling into select stocks in the buy zones for the longer term. Then the long-term positions are surrounded by short-term trades in an opportunistic manner. 

An important pointer for investors to carefully make millions in marijuana stocks is to learn how to properly size their positions and how to build the position sizes correctly. 

Please also read: 

-- What could hurt marijuana stocks? Too much love from investors (https://www.marketwatch.com/story/how-positive-investor-sentiment-could-end-up-hurting-marijuana-stocks-2018-10-16) 

-- To invest successfully in marijuana stocks, avoid this one thing (https://www.marketwatch.com/story/to-invest-successfully-in-marijuana-stocks-add-this-pointer-to-your-list-of-things-to-do-2018-10-09) 

-- Tilray is the poster boy of short-squeeze stock candidates -- here's how to find others (https://www.marketwatch.com/story/tilray-is-the-poster-boy-of-short-squeeze-stock-candidates-heres-how-to-find-others-2018-09-19) 

-- Marijuana beverages are the new thing, but investors should only take sips (https://www.marketwatch.com/story/marijuana-beverages-are-the-new-thing-but-investors-should-only-take-sips-2018-10-02) 

-- Enjoy Coke -- and the money it might make for marijuana invest (https://www.marketwatch.com/story/enjoy-coke-and-the-money-it-might-make-for-marijuana-investors-2018-09-17)ors 

Disclosure: Subscribers to The Arora Report (https://thearorareport.com/) 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 [e-mail]. 

-Nigam Arora; 415-439-6400; [e-mail] 

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October 23, 2018 11:54 ET (15:54 GMT)

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