America just waved a white flag in its war on drugs...
Last week, the U.S. Department of Health and Human Services ("HHS") advised the Drug Enforcement Administration ("DEA") to ease its policy on weed.
The recommendation was to move marijuana to Schedule III status...
Currently, cannabis is a Schedule I controlled substance. Schedule I substances include heroin and LSD, and they come with the harshest punishments for possession.
According to the DEA, Schedule III drugs "have a potential for abuse less than substances in Schedules I or II." Other Schedule III substances include anabolic steroids and cough syrup.
This is a significant shift in posture. And it could kick off a major investment opportunity...
Since 2021, cannabis stocks have been a classic investing "value trap."
We can see it with Canopy Growth (CGC), a publicly traded weed company that acts as a bellwether for this sector. The stock has fallen further and further for more than two years straight.
CGC is down almost 100% from its February 2021 peak. The stock just keeps getting cheaper. But if you tried to call the bottom at any point in the past two years, you almost certainly lost money.
However, the recent HHS recommendation breathed new life into this beaten-down sector.
Weed stocks have spiked since the recommendation. And this spike pushed CGC's price past a key level... the 50-day moving average (50-DMA).
The 50-DMA is exactly what it sounds like. It's an average of the last 50 days of CGC's prices. But it also acts as an important level of psychological "resistance." In other words, traders think the 50-DMA level is a fair value for the stock, so they'll often step in to sell when the price crosses this level.
Because of this tendency, we want to pay special attention when a stock breaches its 50-DMA. And that's just what happened for CGC last week. Take a look...
CGC is trading above its 50-DMA for the first time since February.
I wanted to see what happened when CGC broke its 50-DMA in the past. So I found the forward returns after days when the price overtook this resistance level.
Since CGC went public in 2014 (under the name Tweed), there have only been 75 days when the stock price pierced its 50-DMA on the way up. So it's a fairly rare signal. But it points to major outperformance for the cannabis bellwether. Take a look...
As I mentioned above, CGC has been stuck in a grinding, multiyear bear market. In an average year, the stock lost about 17% of investors' cash.
But buying when CGC breached its 50-DMA led to dramatic outperformance...
Historically the stock dipped about 3% in the first three months after this signal. But then it cruised to some serious gains. It returned an average of 16% in the six-month period... and 34% in a year.
Now, this is a volatile signal. The largest return in a one-year period was a staggering 455%... But the worst one-year return slashed investors' cash by 87%.
If you do trade this signal, though, the odds are on your side. After cases where CGC breached its 50-DMA, the stock was up one year later 74% of the time. So your chances of outperforming are roughly 3 out of 4.
Just remember, CGC has been a historically risky investment. So keep your position size reasonable... and as always, use a stop loss.
Cannabis stocks have been caught in a grinding downturn. But history says buying after breakouts like today's can lead to outperformance – and we may be in the first stages of a big rally for this sector.
Good investing,
Sean Michael Cummings
Further Reading
One major trend has grabbed headlines this year and sent a few key stocks soaring: the rise of AI. This technological sea change is just beginning. Here are three ways we'll likely see companies get in on the boom... Read more here.
"You will take some losses from time to time," Chris Igou writes. "But by cutting them short, you live to trade another day." This is especially crucial to remember when you're looking at a speculative opportunity. A few key steps can help you minimize your risk in the markets... Learn more here.
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