Short-sellers of marijuana are reducing their bets that the sector will continue to decline.
S3 Partners data shows that short interest in pot stocks has dropped to US$632 million from US$3.14 billion in May 2021, despite the share price declines over the past year. Analysts are skeptical that the federal government will approve a legal weed market soon, but Congress is set to consider some cannabis legislation, which could lead to a rally in the sector.
A managing director at S3 explains that “cannabis short sellers were seeing the market value of shorts decrease, but they were not actively replacing that short exposure,” he says. In general, shorting the cannabis sector isn’t popular.
Legislators’ whims have swayed the highly volatile market. A bill to decriminalize marijuana called the Cannabis Administration and Opportunity Act was announced by Senate Democrats last week.
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The AdvisorShares Pure US Cannabis ETF saw its biggest gain since February, outperforming Tilray Brands Inc. for the first time in more than four months. With Canopy Growth Corp. up to 20%, it was the biggest intraday gain since February 2020 for the stock.
Even so, the rally did not even come close to reversing the steep declines in pot stock prices. This year, the ETFMG Alternative Harvest ETF, the sector’s largest fund, soared by 47 percent.
Tilray and Canopy, two of Canada’s largest cannabis companies, have both seen their share prices fall by more than 50 percent and 70 percent this year, respectively, due to their lack of access to the United States market. According to S3, the two companies are still the top short sellers in the sector, accounting for 57% of all short sales.
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Since it would require 60 votes to pass in a Congress where most Republicans and some Democrats oppose it, analysts expect the boost to be short-lived.
According to Canaccord Genuity analyst Matt Bottomley, it is “extremely remote” that a landmark bill will be passed during the current legislative session, given that the mid-term elections are only four months away (and Democrats are expected to lose ground).
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Even if the United States does not legalize marijuana this year, experts believe that the market will be flooded with investors when it does.
However, “we believe that institutional capital is still waiting for additional clarity at the federal level before being able to commit capital to this sector, and although ultimate timing is still uncertain,” Bottomley said, “we believe headlines continue to trend in the right direction.”