How to Trade the Weed Stock Sector Craze

Robert Millar • 12th September 2018

Typically, two to three times a year we get an amazing thing called a sector craze.

A sector craze essentially is when a specific group of stocks from the same industry or sector heat up, pick up volume/volatility, and go parabolic sometimes running 100%, 200%, even 500% in a days/weeks. 

Cryptocurrency, Shippers, Biotechs, and body camera/security sectors all are perfect examples of this phenomenon.  

What sector has been up recently blowing up your gap-up scanners recently? 

Marijuana stocks!

Over the past few weeks tickers like $CGC, $TLRY, and $CRON have been making wild moves with high volume left and right giving traders some amazing opportunities to reel in the big bucks.  

But…

Before you go and get ‘high’ off playing these stocks 😆 there are a few questions you need to know the answers to.

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Where is this volatility and speculation coming from? How did this craze start? How can I play this and other sector crazes safely and efficiently? What do things look like going forward?

Check out our Podcast below to find out! 

Watch Episode 4 of the Fous4 Podcast on the Weed Stock Craze 👇

What started the run?

Marijuana stocks have always been volatile.  A lot of people love to speculate and trade them. Especially when legalization news start to spur up. 

Recently though, the huge run has been mainly due to Canada’s possibility for national recreational legalization. The Canadian government recently elected to legalize marijuana use which has lead a lot of pro-marijuana U.S. investors to believe we aren’t far behind now.

So what did they turn to first? 

The first of the weed stocks to start running was Tilray Inc. ($TLRY), a recent Canadian IPO on the U.S. public markets that ran from nearly $20 to $105 in a matter of weeks. 

We alerted $TLRY at $28 and sold at $40 for a nice 42% gain! 📈 Check it out. 

and then it got high…

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Following suit were more marijuana distribution, research, and manufacturing plays like Cronos Group ($CRON), India Globalization Capital Inc. ($IGC), and Canopy Growth Corporation ($CGC).

After $TLRY reported earnings, the sector picked up even momentum sparking big moves from weed plays on the OTC market like $CANN, $ACBFF, and $APHQF.

How can I safely play a sector craze like this?

Every sector craze or run has similar characteristics. There is ALWAYS a leader and then its followers. The leader right now in this particular case is $TLRY as it is the most volatile, has the most volume backing it, and has the most speculation surrounding it of the group.

As always, there are two ways to play a sector craze…. Long or short.

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Both can be very profitable but also extremely dangerous if done carelessly.

With the technical setups, strategy and stock scanning at Fous4Trading we are always in and out before the crowd. This is where you want to be!

Like with our $TLRY alert and trade…we got our piece of the pie.  Then the crowd jumped in and went parabolic. 

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Long

If you are looking to make your money on the long side during a sector craze, you want to make sure you are early and are NEVER chasing moves. We longed $TLRY or example at $28 as we saw volume and hype start to come in due to the news on Canada. This was one of the first days of the initial run which, and after that we have not touched it since.

If you are late to the party and missed the initial move on the leader, you can also look to long any other stock in the industry (it’s followers or “sympathy plays”) if they have solid incoming volume and a good breakout pattern.

Short

What goes up must always come down. Playing these crazes on the short side can be even more profitable and easier than playing them long, yet the potential for loss is much much much greater.

Like I said before, every sector craze like this before has a “leader” that ignites the move and then some followers which are called sympathy plays.

The idea on the short side is to wait for the leader of the sector to start to top, lose volume, and fade off then hit the more predictable and less volatile sympathy plays on the downside.

For example, the bitcoin craze was led by $LFIN. Once this started to lose volume and fade off, so would it’s “sympathy plays” like $RIOT, $XNET, and $NETE. You can take these short knowing that the only reason they were up was due to the fact that another stock in their industry was up big.

Trading the sympathy plays based off of the leader is much safer to do since their moves are typically more predictable and less volatile, yet also still give some huge account-changing opportunities to take advantage of. As always with shorting though, your potential for loss is infinite so keep yourself disciplined, focus on risk management, and stay safe when playing these runs to the downside.

What is the best way to look to play these going forward?

All in all, the safe way to play this marijuana sector run (or any sector run for that matter) is to wait for the leader, $TLRY, to get its head cut off then start to look for signs of weakness in the sympathy plays like $IGC, $CRON, and $CGC then take those down.

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