Market Overview

Here's Why The Marijuana ETF Could Be A Short-Covering Idea

Here's Why The Marijuana ETF Could Be A Short-Covering Idea

The ETFMG Alternative Harvest ETF (NYSE: MJ), the only U.S.-listed exchange-traded fund that's a pure play on marijuana-related equities, is enjoying a solid rebound effort in May with a gain of about 7 percent this month.

There are some catalysts, political and otherwise, that have the potential to generate more near-term upside for MJ and pot equities.

What Happened

“A key development for the US Marijuana industry came on April 13th, when President Trump confirmed he had promised Colorado Senator Cory Gardner that US AG Jeff Sessions revocation of the Cole memo will not affect the state's legal Marijuana industry,” said IHS Markit in a recent research note. “That was a very timely update, with the combined market cap for Marijuana related stocks hitting a 2018 low on April 9th. Since then the market cap of those stocks has risen by $3.4 billion, a 13 percent increase.”

Home to over $380 million in assets under management, MJ tracks the Prime Alternative Harvest Index. The ETF holds 38 stocks.

Why It's Important

Markit data indicate a slew of marijuana stocks are currently sold short in significant fashion.

“Short sellers have not backed down, increasing the combined short position in Marijuana related stocks to nearly $2bn, a level just below the all-time high on January 24th,” according to the research firm. “Since that last high point in short positions, the total market cap has fallen by $5.5 billion, or 15 percent. Short sellers have generally increased positions on a lag to advances in share prices, but have kept up the overall pace with the total market cap increasing by 92 percent since the start of Q4 2017, while short balances have increased by 102 percent.”

Markit points to 10 marijuana-related stocks with significant short interest, a group that includes several of MJ's top 10 holdings, indicating the ETF could be well-positioned for a possible short-covering rally.

What's Next

“On June 7 Canada's Senate will vote on bill C-45, legislation which would make the recreational use of Marijuana legal throughout the country, in essence regulating recreational Marijuana use in a manner similar to tobacco,” said Markit. “The road to recreational legality in Canada received a boost on March 23rd when a group of Senators who opposed the bill were unable to muster the votes to prevent the bill from reaching this final stage of legislative approval.”

This is important because Canada is where many of the more credible marijuana stocks, including some MJ holdings, are listed. For its part, MJ allocates over 61 percent of its weight to Canadian stocks, by far the ETF's largest geographic exposure.

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