Marijuana Momentum, Airlines Ascending: Groups in Focus

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Two different groups have been “flying under the radar” and “hitting new highs” in recent weeks. Let’s check them out.

First: Flying under the radar. Yep, some of the airlines have been climbing. This group is a bit muddled because performance between carriers has been so different. But it’s worth mentioning that incremental news has swung sharply in a bullish direction over less than the last month.

For example on August 20 analysts at firms including Cowen and Bank of America Merrill Lynch cited rising fares and slowing capacity growth. The next day, ARCA’s Airline Index ($XAL) spiked to its highest level since May 25. On August 29, industry group Airlines for America gushed about the busiest Labor Day ever.

So far, the leaders have been Spirit Airlines (SAVE) and United Continental (UAL). For you options traders, American Airlines (AAL) usually has the most volume, but it’s also been one of the worst performers.

Speaking of options, let’s turn to “hitting new highs”: Calls and puts have been lighting up in the cannabis space. This group has materialized out of a puff of smoke in the last 1-2 months as traders look for exposure to Canada’s planned legalization of marijuana on October 17.

Three stocks are clearly associated with this trend:

Cronos (CRON) looks to invest in developers of cannabis-based products and drugs. It had a big jolt higher this week after signing a partnership with Ginkgo Bioworks.

Tilray (TLRY), a producer of medical-grade marijuana, only went public in mid-July but it’s already trading north of 50,000 options contracts per day. The firm reported strong earnings on August 28 and spoke the next day about the potential for nationwide legalization in the U.S. Hey Wall Street, put that in your pipe and smoke it!

Canopy Growth (CGC), showing options activity and events.

Canopy Growth (CGC) is another greenhouse operator that started blitzing higher after receiving a $4 billion investment from beer maker Constellation Brands (STZ). It’s also seen options volumes climb from about 5,000 contracts per day to over 50,000.

Averaging it out, these three companies have gained about 140 percent in the last month. One noted short-seller, Citron’s Andrew Left, has criticized CRON in particular. It’s also hard not to notice that these companies trade at extremely high price-to-sales multiples despite making little or no profit.

Will sentiment keep lifting these names or will the gravity catch up with them? Regardless, traders should keep the October 17 date on their calendars. And when you consider U.S. mid-terms follow less than a month later, don’t be surprised if this issue starts popping up on this side of the border before long!

Bottom line: The broader market’s been pretty quiet of late. But two areas have shown signs of life amid the summer doldrums.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.