Illinois is a relatively big state, the sixth-largest in the U.S. when measured by population. And it just legalized marijuana, the 11th state to do so.

Adults, 21 and older, will be able to buy and possess cannabis starting Jan. 1. Prior low-level convictions for marijuana possession will be pardoned.

Amid this news, one would expect marijuana stocks to run higher, but that’s not happening.

Just like a doctor does X-rays to see what is going on inside the human body, investors can do an X-ray of marijuana stocks to figure out what is really going on. Segmented money flows provide the X-rays. Since I wrote “How to potentially become a marijuana millionaire, albeit carefully,” a lot of money has been made in marijuana stocks by following segmented money flows. So let’s examine the latest money flows.

Chart

Please click here for a chart showing segmented money flows in 17 popular marijuana stocks. Please note the following:

• A big part of the runup in marijuana stocks earlier this year was due to short squeezes.

• A short squeeze occurs when short sellers either panic or are compelled to buy stocks to cover those that were previously short sold. This leads to a lot of artificial buying that is not based on fundamentals. Often the trigger for a short squeeze is slightly good news. Marijuana stocks are especially prone to short squeezes.

• There are not many things about the stock market that any credible person can speak with certainty. However, we can say with certainty that short squeezes eventually end. When short squeezes end, artificial buying goes away and stocks drift down. As an example, take a look at what happened to Tilray TLRY, +1.47% stock. Tilray ran up to $300 in a short squeeze and has now fallen back to $47.60 as of this writing. Please see “Tilray is the poster boy of short-squeeze stock candidates — here’s how to find others.”

• At The Arora Report, our subscribers have profited from signals to buy marijuana stocks when short squeezes start. On the other hand, tremendous profits have been made by short-selling marijuana stocks when short squeezes end. Money is made by short selling when stocks fall. For example, The Arora Report gave a signal to short sell Tilray as high as $280. Profits were taken on most of the position around $100 in tranches. A very small quantity is still being held to reach our target zone for more profits.

• Please see a classic example of making money by buying a stock at the beginning of a short squeeze even though the fundamentals were not there by clicking here for the annotated chart of India Globalization Capital IGC, -0.94% . For an explanation, please see “Marijuana beverages are the new thing, but investors should only take sips.”

• The chart shows that short-squeeze flows have changed from very positive to positive in Aurora Cannabis ACB, -4.23% , Acreage Holdings US:ACRGF, Aphria APHA, -0.47% , Canopy Growth CGC, -1.54% and Curaleaf CURLF, +0.55% .

• The chart shows that short-squeeze flows have changed from extremely positive to positive in New Age Beverages NBEV, +1.21% and Cronos CRON, -1.55% .

• Short-squeeze flows are still very positive in marijuana ETF MJ, -0.94% .

• Short-squeeze flows are positive in MedMen MMNFF, -4.00% and Liberty Health LHSIF, +4.55% .

• Smart-money flows are positive in Corbus Pharmaceuticals CRBP, +1.62% and neutral in Craft Brew Alliance BREW, +0.06% .

• Smart-money flows are negative in GW Pharmaceuticals GWPH, +0.25% , KushCo Holdings KSHB, -5.68% , Scotts Miracle-Gro SMG, -0.58% and Constellation Brands STZ, -0.83% .

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Rankings

The chart shows the relative rankings of the five select popular marijuana stocks. These rankings are based on the six screens of the ZYX Change Method. Please click here to learn about the six screens.

Risk-adjusted rankings are more useful for medium- and long-term positions. Non-risk-adjusted rankings are more useful for short-term or trade-around positions.

What to do now

Marijuana stocks are volatile. Volatility will cause many to lose their shirts. Segmented money flows are the best tool to keep your marijuana investments prudent.

There is merit to holding core marijuana positions. Astute investors would want to make sure that their position sizes are correct. Arora’s 14th Law is directly applicable in this situation: “To be successful at investing and trading, become a master of position sizing.” Position sizing is critical to investing in marijuana stocks. In addition, using techniques such as trade-around positions is especially important.

Those not in marijuana stocks may consider waiting patiently for signals to buy select marijuana stocks. There is too much risk in buying these stocks right here. Of course, there are exceptions in buying new special situations in marijuana stocks as they develop and also for short-term trades.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.