Although cannabis firm Sundial Growers (NASDAQ:SNDL) has a reputation for being a “meme” trade, fundamentally, the bullishness toward SNDL stock isn’t totally unjustified.
Thanks to growing interest in the space and the broader push for legalization, Sundial appears to at least be playing the right game.
Moreover, the election of President Joe Biden incentivizes speculators to consider SNDL stock. True, while Biden is a Democrat, he largely stays middle of the road. Turns out, this has frustrated the progressive arm of the Democrats while likely pleasing no one in the Republican camp. And to be fair, Biden ran on the promise to decriminalize marijuana.
Of course, this falls short of legalizing cannabis at the federal level, a line that the president appeared unwilling to cross. Plus, you have the debate over student loan relief which again Biden has irritated his fellow liberals with his moderate stance. Having him as president was not the progressive panacea some were looking for.
Nevertheless, the critical point is that with Biden, the chances of full legalization are greater than if President Donald Trump – with his law-and-order stance – were still in office. Despite the frustrations, SNDL stock is politically in the most ideal position.
Still, let’s be brutally honest. Many if not most folks speculating on SNDL stock are doing so not necessarily because of the political tailwind but because shares have a very strong following on social media.
As InvestorPlace contributor Ian Bezek noted recently, SNDL stock might get another bump from social media warriors. Indeed, with the crazy turn of events that we’ve seen out of GameStop (NYSE:GME), it’d be almost irresponsible not to mention this possibility.
However, Bezek did warn that you shouldn’t hold your breath. How then should speculators approach Sundial Growers at this juncture?
The Technical Breakdown of SNDL Stock
Two words – very carefully. As I stated in early February, it’s great that SNDL stock was able to harness the power of the internet. Unfortunately, we also saw that meme stocks are not invincible. And that should make rational traders think twice.
Of course, I’d be remiss to point out that shortly after my cautionary note, Sundial Growers skyrocketed to ridiculous heights before crashing back down. But even with the crash as I write this, shares are still above the price of my article’s publication date.
I don’t want to test my luck with such an emotionally driven and volatile security, but I do think that the downside risk of SNDL stock is greater than its potential upside magnitude. It all comes down to technical momentum.
Since roughly late September 2020, SNDL stock began charting a bullish trend channel. You can see that for the most part, the highs and lows of the price action has stayed neatly inside the channel.
However, nothing rises indefinitely. And I fear that in the most recent sessions, the technical damage done has pushed SNDL ever so slightly outside the channel. Further, the velocity of this latest sell-off may soon start shaking off speculators, many of whom are levered up on margin, according to data from finra.org.
You can post all you want about diamond hands. When you’re losing thousands of dollars by the hour, people’s mentality changes right quick.
Not to play up the risk factor, I should also point out that in late January, SNDL stock went well outside the bullish trend channel. I’m going to go out on a limb and say that under traditional technical interpretations, most traders from this discipline would have dumped out. However, social media may have saved the day for the bulls.
Will that happen again this time around? It very well could but I also doubt it.
Too Much Froth
Like anybody, I appreciate a good story – and this “war” against short traders perpetuated on social media has been a good one, albeit incredibly misguided. I will contend that you absolutely need people to take the other side of the trade in order to have healthy markets. Otherwise, you get the extreme boom-bust cycles that generally regular folks don’t care for.
I look at it this way. Levering up on stocks just because they’re targeted by short traders is like constantly eating Mexican food without using the facilities. Sure, you might be able to hold it for a day or two. But eventually, you’re going to experience what’s known as a pop-pop-pop-boom cycle.
Whether it’s your digestive tract or the oil in your (combustion) car or yes, even the financial markets, you’ve got to flush out the gunk that builds up in the system. And looking at the charts, I’m sensing that SNDL stock has eaten too many frijoles.
On the date of publication, Josh Enomoto held a long position in GME.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.