The current market rally which began way back in March 2009 has now become the best bull market ever. The 10-year run now has the S&P 500 up nearly 480% over the past decade. Lower taxes, corporate buybacks and extremely easy monetary policy has fueled this epic move higher. Certainly 2019 looks to be another solid year of gains for stocks. The real question is whether 2020 will continue to pop or will we finally see the long-awaited drop.
Along with the cheap money comes historically expensive stock valuations. The price-to-sales ratio for the S&P 500 now stands at the highest reading on record at 2.09. This should warrant some caution going forward for traditional stocks and momentum investing, especially given that interest rates aren’t likely to go too much lower. I expect the major indices to languish at best in 2020.
In my opinion, 2020 will be the year of the contrarian. The out of favor, Dogs of the Dow type methodology will likely generate the most alpha as we enter the next decade. The sector that best embodies this philosophy is cannabis. A preferred way to take a stake in this burgeoning business is with the largest ETF to target the cannabis industry: The Alternative Harvest ETF (NYSEARCA:MJ).
MJ (yes, a play on Mary Jane) is composed of the biggest names that comprise the cannabis industry. Below is a list of the Top 10 holdings, which account for more than half of the overall ETF. MJ tracks the Prime Alternative Harvest Index, which was designed to measure the performance of companies within the cannabis ecosystem benefiting from global medicinal and recreational cannabis legalization initiatives. To put it another way, these are the biggest pot stocks.
Cannabis stocks certainly were flying high not too long ago. MJ made an all-time high at $45 a little over a year ago and was near $40 in March of this year. Since then, pot stocks have come down hard. MJ is down over 60% from its all-time highs and over 50% from its March highs. Some of the selling was warranted as the euphoria surrounding cannabis had gotten out of hand. The selling has now gone too far, too fast. MJ is ready to roll again.
MJ is looking decidedly better from a technical perspective. Shares look to have finally found support at the $16 level. RSI has improved after reaching deeply oversold readings. MACD continues to remain positive and momentum has turned higher. The MJ ETF also looks poised to break back above the 20-day moving average. An ultimate run back to $23 would be the initial upside target.
The cannabis market is expected to grow at an annual rate of 30% over the next four years. Projections are for about $40 billion in sales in 2023 from the current sales of roughly $10 billion. This growth will be fueled by recreational usage as more states and countries legalize marijuana. New inroads into the medical uses of cannabis, especially for pain management, will also spur growth.
Cannabis has now become an accepted part of society and will likely remain so in the future. The ability to buy into an industry at the formative stages makes MJ a solid addition to the portfolio. Given that it is trading near all-time lows while stocks generally are at all-time highs makes it all that much better. And that’s ultimately why I’ve chosen it to win InvestorPlace.com’s best ETFs contest for 2020.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at email@example.com.