Pot Stock Rally Burns Short Sellers for $105 Million

(Bloomberg) — A surge in cannabis company stocks has left short sellers with more than $105 million in losses this year, but that hasn’t stopped traders from betting against the sector.

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According to a report from S3 Partners LLC, short sellers have invested $91 million in new positions in the past 30 days, betting that cannabis stocks will decline despite paper losses. The contrarian trades come as cannabis companies are on the rise in hopes of reclassifying marijuana and getting the SAFE Banking Act, which would make financial services more accessible to the industry, advanced in the U.S. Congress.

This month, the MJ PurePlay 100 Index, a basket of stocks from U.S. and Canadian cannabis companies, is up 19%.

“If the rally was overdone or if these measures take longer than expected to bear fruit, we could see weakness in the stock price and an increase in short selling in this sector in the future,” Ihor Dusaniwsky, managing director of predictive analytics at S3, wrote in the report .

Read more: Pot stocks post best week since 2020 as US shifts drug use

Despite the recent rise, cannabis stocks are 91% below their all-time high set in October 2018. The industry has been buoyed by positive industry developments.

In August, the U.S. Drug Enforcement Administration announced it would review the classification of cannabis on the recommendation of the deputy secretary of health, and there was a report that the SAFE Act could receive a review session in a Senate committee next week.

Read more: Pot stocks rise on hopes the SAFE Banking Act advances

To be sure, there is still a lot of overhang in this sector, which short sellers seem to be counting on. The SAFE Act has so far failed to reach a vote in Congress. And cannabis would still be illegal at the federal level even if reclassified by the DEA.

Short sellers have concentrated most of their positions in 10 cannabis companies over the past two years, according to data from S3, which tracks a basket of 126 industry stocks traded in the U.S. and Canada. Over the past 30 days, they have placed the majority of their contrarian bets against Tilray Brands Inc. and Canopy Growth Corp. completed.

(Updates stock movements as of market close.)

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Russell Falcon

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