After a seemingly endless campaign season that has seen shocking and seemingly surreal twists and turns, the 2016 election is now just days away. While most of the media attention has been focused on Donald Trump and Hillary Clinton, there will also be very important votes on marijuana proposals in nine different states.
From a social perspective, gaining medical and/or legalization in all or most of these nine states would be a big step in the right direction for the marijuana legalization movement. However, from a trading perspective, the vote could be a dangerous catalyst for the market.
Marijuana stocks have been on quite a tear this year as investors have high hopes about the election results. As of late October, these stocks had averaged a 137% gain in 2016, according to the Marijuana Index, which tracks the movement of marijuana stocks.
Excitement about the outcome of the election is certainly high among marijuana traders. In fact, according to Marijuana Index Vice President Dan Nicholls, it may be a bit too high.
“It is really pushing prices to crazy highs,” Nichols recently told Forbes, adding that marijuana stocks are inherently “very risky.”
Seasoned traders know that the biggest market moves related to a major news catalyst, like an election, often occur prior to the event. Hence the old Wall Street adage that traders should “buy the rumor and sell the news.” For marijuana stocks, the rumor could be that marijuana will win the majority of its legalization votes. However once the vote takes place, traders nervously sitting on huge gains will no longer have a catalyst to drive further upside. Conditions seem ripe for a significant post-election sell-off, even if marijuana stocks initially surge higher following the election results.
On the other hand, if marijuana legalization gets voted down in a number of states, it’s easy to imagine that loss of momentum could be devastating for the marijuana industry. Traders should be aware that these marijuana stocks may be in a lose-lose situation in the days following Election Day.
To make matters worse, almost all stocks with significant exposure to the marijuana business aren’t listed on major U.S. stock exchanges. Popular marijuana stocks like Zoned Properties Inc (OTCMKTS: ZDPY), AeroGrow International, Inc. (OTCMKTS: AERO) and CANOPY GROWTH CORP COM NPV (OTCMKTS: TWMJF) all trade over-the-counter in the U.S., meaning they are not subject to the level of regulatory oversight as NYSE or Nasdaq-listed stocks are. In addition, many of these stocks have limited liquidity, making them extremely volatile.
Finally, it’s important to remember that, while marijuana may be legalized on a state level in certain regions of the country, it is still illegal at a federal level. Until federal law changes, these businesses will remain risky long-term investments.
Marijuana stock traders should probably cash out their big gains in these stocks at some point in the coming days. The safest play would be to lock in gains on or ahead of Election Day, but any immediate post-election run-up in these stocks should probably be sold as well.
Disclosure: the author holds no position in the stocks mentioned.
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