Pot Stock Rally Burns Short Sellers for $105 Million

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(Bloomberg) — A surge in shares of cannabis companies has saddled 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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In the last 30 days, short sellers have plowed $91 million into new positions betting that pot stocks will decline despite the paper losses, according to a report from S3 Partners LLC. The contrarian trades are taking place as cannabis companies are rising on hopes that marijuana will be reclassified and that the SAFE Banking Act, which would make financial services more accessible to the industry, will move forward in US Congress.

This month, the MJ PurePlay 100 Index, a basket of US and Canadian cannabis company stocks, has gained 19%.

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

Read more: Pot Stocks See Best Week Since 2020 as US Mulls Drug Shift

Despite the recent surge, pot stocks are down 91% from their all-time highs reached in October 2018. The industry has been lifted by positive industry developments.

In August, the US Drug Enforcement Administration said it would review the classification for cannabis following a recommendation from the Assistant Secretary for Health and there was a report that the SAFE Act could get a markup session in a Senate committee next week.

Read more: Pot Stocks Rise on Hopes SAFE Banking Act to Move Forward

To be sure, there’s still major overhangs for the sector that short sellers appear to be counting on. The SAFE Act has previously failed to reach a vote in congress. And cannabis would still be illegal on the federal level even if it is reclassified by the DEA.

Short sellers have concentrated most of their positions in 10 cannabis companies in the last two years, according to data from S3, which tracks a basket of 126 US and Canadian traded stocks in the industry. In the last 30 days, they have made the bulk of their contrarian bets against Tilray Brands Inc. and Canopy Growth Corp.

(Updates stock moves at market close.)

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