OPINION/COMMENTARY

One of the most fascinating stocks in the market right now is Tilray (TLRY) . It hit an all-time intraday high of more than $127 this Thursday, has doubled in the past few days and has increased some 500% since going public in July.

There's no big mystery as to what's driving Tilray higher -- it's a key stock in the legal-marijuana business, the market's hottest investment theme right now.

Of course, I suspect that virtually no one thinks there's a logical basis for Tilray's current valuation. Its market cap has gone above $11 billion even though the company had less than $20 million in sales in 2018's first half. Short-selling firm Citron Research was calling the stock wildly overpriced back when Tilray was in the $60s, but that's had no impact so far.

To understand why, it's important to realize that valuation is irrelevant to Tilray's stock price at this point. Instead, the market's thinking is identical to what you see with Ponzi schemes. All that matters now is that there's a belief in the market that there's still someone out there who's willing to buy Tilray at an even-higher price than what it's trading for now.

When a stock keeps going straight up, it's very easy to believe that there's an endless supply of buyers willing to pay even more for it. But eventually, Ponzi schemes and soaring stocks fail because both run out of new buyers who believe that the rally can continue.

When that shift in thinking occurs, a security's fall is usually swift and brutal. There's typically one last gasp as the speculative money tries to catch another run, but once the idea takes hold that new buyers don't really believe in the investment's potential to rally even further, prices start to collapse.

Frankly, it's likely that virtually no one who's buying Tilray right now believes that the stock will stay at these levels for long. However, they're confident that the stock's momentum is so strong that it will keep attracting buyers willing to purchase the name regardless its real value.

If you focus solely on value, you'll never understand what's happening with stocks like Tilray. But this is the trader's equivalent of a Ponzi scheme. When you understand that, then Tilray's rally makes perfect sense.