The Alternative Harvest ETF (NYSEARCA:MJ) certainly had better second quarter than the carnage seen in the first three months of the year. The MJ exchange-traded fund tacked on a respectable 15% gain in Q2, although it did fall short of the monster 18% gain for the S&P 500 in the same time frame. Unlike most of the S&P 500 companies, marijuana companies are still seeing impressive growth rates. I expect MJ to be a solid out-performer in Q3 and it could still rank among the best ETFs this year.
The technicals are looking decidedly more bullish for MJ after the rebound on Monday. Its 5-day RSI reached oversold levels that corresponded with significant lows in the past. Its MACD is finally firming after reaching similarly oversold readings. Momentum turned significantly higher after printing at the lowest level since the March lows.
The MJ ETF also held above the uptrend line as it continues to make a series of higher lows.
Most importantly, MJ had a reversal day on Monday. Shares opened lower and traded down towards the trendline at $12.50 before ultimately pivoting to close higher on the day at $13.01. This type of price action, especially following two weeks of heavy selling, is many times emblematic of a low in the fund. The sellers have become exhausted and the buyers have taken control.
Is MJ Still One of the Best ETFs to Buy This Year?
The MJ ETF continues to be a popular favorite of the Robinhood crowd. It came in eighth among the younger, more aggressive traders using the Robintrack website to track number of users holding a particular ETF. There has been a nice uptick in overall holders off the March lows. I would expect that to continue, especially if MJ can continue to generate upside momentum.
Legalization of marijuana continues to grow on a statewide level. Eleven states have now made it fully legalized (13 if you include Guam and the District of Columbia). Other states may likely consider legaization to bolster the tax revenue hit hard by the novel coronavirus. It continues to be illegal, however, on a federal level for both recreational and medical use.
Now that Joe Biden appears to be widening his lead against Trump, I would expect a greater probability of federal legalization. The left wing is certainly more legalization friendly than the right. Canada has made it fully legal on a federal level since October 2018 with the addition of Legalization 2.0 allowing edibles, extracts and concentrates in 2019. This is one of the main reasons why Canadian pot stocks trade at a higher multiple than their U.S peers. The prospect of full federal legalization would be a boon to MJ.
Grand View Research expects the legal marijuana market to grow at just over 18% annually for the coming years. They look for the global legal marijuana market size to reach over $73 billion by 2027. This should provide a solid backdrop for MJ, especially given the negative growth rates for most businesses due to the Covid-19 crisis.
The burgeoning uses for cannabis-based products in the medical field cannot be underestimated. Cancer, arthritis and Alzheimer’s are just three of the conditions that continue to see an increase in cannabis-based treatment. Long-term pain management continues to be the largest component of medical marijuana use. This should continue to grow as our population continues to live longer.
The MJ ETF has certainly underperformed year to date. It looks to have put in a floor in the price and has begun to grind higher. A move back above the recent highs at $15 could get the momentum investors back in full force. With so much potential good news on the horizon, it won’t take much to get MJ back to the momentum it was demonstrating in early 2019.
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 weekly option and volatility newsletter can visit the Options and Volatility Newsletter website.