The last time the Investment Industry Regulatory Organization of Canada (IIROC) intervened in the trading of Canadian publicly traded cannabis companies was in November 2016. Canopy Growth Corp, the first, biggest, and most valuable ACMPR-licensed grower had popped to over $17 a share on no news, and IIROC halted trading to “to ensure a fair and orderly market.”

IIROC halted stocks multiple times that day, with trading resuming on an average of about 10 minutes later in all cases.

What followed was the onset of a downward revision in valuations for all the major publicly-listed cannabis players, which culminated in a halving of the value, roughly, of the entire sector. (see chart below).

But on the last trading day of 2017, IIROC again stepped in, this time after a handful of the largest stocks had begun to sell off after spiking by as much as 20 percent that day, as traders took profits from an outstanding lift in valuations over the few previous sessions.

Is this the event that will catalyze a reversal beginning in 2018?

I think it is.

Traders and investors alike don’t like it when a regulator steps in to limit the downside or the upside to their investing. And rightly so: a free and fair marketplace must be unencumbered by government intervention unless there is strong evidence of malfeasance, corruption or manipulation.

In this case, just as in November 2016, regulators halted trading in an attempt to cool the irrational exuberance that can cause stocks to soar with little material justification. This is the essence of speculation. If you’re going to limit my upside without limiting my downside, you have just undermined the rationale for any risk/reward model.

It’s irresponsible, in my opinion, and constitutes regulatory overreach.

But the reasons for my conviction that we have just seen the top in cannabis stocks for the near future is more fundamental.

The Canadian government has stipulated that it will seek to triple the number of ACMPR licensees before the end of 2018, which suggests that there could be another 160 licenses granted in the next 12 months.

If you consider that the funded growing capacity of the 20+ publicly traded cannabis growers is above 2 million kilograms per year according to a rough survey of their financials, and that the most optimistic demand projection for the next 12 months is no more than 750,000 kilograms (including both medical users and assuming all illegally sourced recreational consumption), it is clear that we have an imminent supply glut.

Analysts from the investment banks are of course expected to publish wildly optimistic numbers – licensed broker dealers are the only ones actually allowed to do so. But if you consider, for a moment, what might be the funded growing capacity of the over 50 non-public ACMPR growers (and therefore, not publicly reported), you can see there might be cause for a little bit of caution.

But caution, it would appear, is not in the vocabulary of Health Canada’s licensing thought process.

Already, institutional investors in Canada are telling me that the value of a license is approaching zero with no funded growing capacity. What is it worth with 200% more licenses?

There are mitigating factors to consider.

Media stories promoting the idea that there will be a global trade in cannabis and related products is likely largely responsible for the year end feeding frenzy in cannabis stocks. And there is likely some genuine demand momentum in that narrative. But which of the countries just now adopting legalization measures won’t ultimately seek to capture the economic benefit of the nascent industry by growing it themselves in the end? The export premium should be short-lived, at best.

And bear in mind; at the end of the day, cannabis is commodity with a slightly more sophisticated range of growing environment variability than canola oil or wheat. But not a whole hell of a lot.

Overall, I think the valuation picture in Canadian cannabis pubcos could be maxed out, in the case of the largest ones. I think investors will be able to score wins on newly listed, well managed and funded ACMPR growers in 2018. At least until the supply glut starts showing up on the balance sheets of the majors.

But on the bright side, California – the world’s largest cannabis market – goes legal recreationally tomorrow. And there are a few Canadian-listed companies who are poised to benefit from that evolution.