The Alternative Harvest ETF (NYSEARCA:MJ) certainly had a rough start to 2020. Concerns about cash and the novel coronavirus drove many cannabis stocks to all-time lows. Undoubtedly some of the companies won’t be able to weather the storm and will have to close shop. The survivors, however, should benefit from decreased competition and increased demand.
Look for the MJ ETF to continue to outperform over the coming months.
I was somewhat leery of the overall market in my initial analysis on Dec. 10. Valuations in stocks were stretched which portended to a somewhat difficult year in 2020. That has more than come to fruition with the coronavirus having a devastating effect on virtually every stock.
MJ — and all of the other funds in the best ETFs contest — wasn’t initially immune to the carnage. The cannabis ETF had dropped by a third in that time frame, which is nearly twice as bad as the S&P 500.
The past week, however, has seen the bigger marijuana stocks vastly outperform the major indices. Canopy Growth (NYSE:CGC), the largest holding of MJ, has rallied over 50% since bottoming on March 18. Cronos (NASDAQ:CRON) is the third largest holding and is up a similar amount.
The recent red hot rebound in some of the bigger names may very well be the beginning of a meaningful move higher in MJ.
Is MJ Still One of the Best ETFs Right Now?
The coronavirus pandemic has made many states deem marijuana an essential item, putting it on par with staples such as groceries and pharmaceuticals. A recent survey from YouGov shows that a majority of Americans agree with the states on this decision. In fact, 53% of U.S. adults were in favor, while only 26% thought marijuana dispensaries should not be classified as essential.
This shows how quickly marijuana has been adopted by the American public, especially by Democrats who tend to have a younger demographic. This bodes well for the long-term growth of the cannabis industry.
Marijuana sales since the coronavirus crisis echo that sentiment. Recreational sales have increased 50% on the past week while medical sales have nearly kept pace with an increase of 41%, according to Flowhub. Cannabis lines have formed, joining guns, liquor and toilet paper as must-have items to help ride out the stay at home orders.
While the big bump in sales may be fleeting, the overall rise should be long lasting. It will definitely boost the bottom line for many cannabis companies for the next quarter. This may be the catalyst MJ needs to head higher and become one of the best ETFs this year.
The technicals are starting to look a lot better for the cannabis stocks as well. A three month chart shows how deeply oversold the pot stocks became with the 14-day RSI breaching 20 before rebounding strongly. The MACD also reached an extreme before turning up sharply. Momentum has also improved greatly and is now positive. The MJ ETF has breached and exceeded the 20-day moving average. This should provide short-term support for marijuana stocks.
Volatility begets opportunity. Cannabis stocks have always displayed a much more volatile price pattern than lower beta, more mature stocks — both to the downside and upside. The marijuana names that comprise MJ are now showing the ability to generate revenues when most other industries are declining rapidly in the coronavirus crisis. This will likely be richly rewarded in Q2.
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.