In an ongoing display of strength, Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) shrugged off early profit taking by roaring back into the close. The price action is reminiscent of the October-November 2006 and November-December 2017 time periods, where indiscriminate buying sent shares catapulting upwards after breaking technical consolidations.

How powerful was Canopy Growth’s bid after 11:00am today? Consider that despite a ↓7.37% gap-up selloff in the session’s opening 1.5 hours, prices stormed back to obliterate the all-time high. Neither a harrowing price drop, nor an overextended near-term technical picture caused bulls to flinch. Buyers simply let the short term profit takers do their thing, then stormed back into the market with calculated abandon. That’s exactly what vigorous bull markets look and fell like.

Furthermore, today’s price action is extremely bullish insofar that the previous all-time high—$44.00/share on the TSX—was so meekly defended. Predictably, the morning gap above that level failed. However, bulls were able to pierce the glass ceiling on their next attempt with relative ease. There was no multi-day feeling-out period, no whipsawing above and below the $44.00/share threshold—nothing.

Prices simply coalesced around the $43-level after the morning dump, approached $44.00/share in the afternoon, then punched through right away. Prices didn’t even attempt a re-test; they simply melted up and closed above today’s open gap high. The bullish price action perfectly exemplified what little power bears possess right now, aside from irregular (if not powerful) bursts of energy.

While the voraciousness of the move may surprise some, the epidemiology behind the strength makes sense.

As the pre-eminent leader in the space, Canopy Growth is entwined in a perfect storm of conditions. We have the recent NYSE listing, which opens up a plethora of American investment capital; we have the successful Bill C-45 vote and subsequent earnings visibility; and we also have dozens of funds—pension, growth, index, alpha-focused hedge funds—all clamoring to stake 6 & 7-digit share positions at once.

Many of these funds are looking 3-10 years down the road, and are not especially finicky on price point. Hence, when Canopy Growth closed above its inaugural NYSE listing high for a second time, and overarching strength became obvious, panic buying ensued. Although I can’t prove it, I suspect multiple funds have been piling into WEED over the past few days, with the goal of obtaining a pre-defined stake within Canopy’s pre-legalization high.

Adding kerosene to the fire is a growing short appetite from contrary investors who believe cannabis stocks are overvalued. According to ShortData.ca, Canopy Growth had around $700 million of notional value short as of May 30th. Presuming a generous average aggregate short price of $35.00/share (Canopy Growth traded below $35.00/share in every session between January 30-May 17, 2018), the data implies that somewhere in the neighborhood of 20 million shares have been short sold—or roughly 10% of the float.

Once a stock starts pushing double-digit short interest, it becomes prone to short squeezes and other shenanigans.

$CGC $WEED.CA The short position on Canopy Growth was reported by the WSJ as 15.6M on the NYSE as of May 31, up 8% from 14.8M on May 15. Including the TSX short position, almost 10% of the outstanding Canopy Growth shares are sold short. https://t.co/Ftxfa3PxmV — Chris Damas (@BCMIResearch) June 12, 2018

Also consider several high-profile publications (a.k.a mainstream media) have been floating the perceptions that investors are salivating at the chance to short cannabis stocks. Whether that’s fueling the short interest overall is uncertain. But what is certain is that as of today’s close, all bearish bets are underwater.

Given the current strength in Canopy Growth, that’s a very vulnerable position to be in.

Looking Ahead

Looking ahead to the near-term outlook, there’s little evidence to suggest prices can’t extend further in the coming days. If funds are indeed aggressively accumulating Canopy Growth stock (like we suspect), institutions may continue to dollar cost average upwards and still achieve a palatable average price. Put another way: If a Fund wished to accrue a 5-million share position, and currently owned 2.5 million shares at a $40.00 average cost basis, buying WEED to $50/share could still yield an average cost basis near a desired level.

In the coming days, we’ll take a closer look into the current technical picture an attempt to glean how much price appreciation is left on this current run.