Friday was a good day in the stock market, with the S&P 500 up 1%. It was a very good day for small-cap stocks, with the Russell 2000 up 1.7%. But it was a fantastic day for a number of cannabis companies, moving sharply higher on strong volume:

What happened?

The catalyst: the Biden-Sanders Task Force

The catalyst was the release of the “Biden-Sanders Unity Task Force Recommendations,” a 110-page document laying out priorities for a presumed Biden administration. For cannabis companies, the relevant part of the recommendations runs,

“Democrats will decriminalize marijuana use and reschedule it through executive action on the federal level. We will support legalization of medical marijuana, and believe states should be able to make their own decisions about recreational use.” (p. 9)

There is also this line:

“Lift budget rider blocking DC from taxing and regulating legal marijuana.” (p. 59)

The Sanders wing of the party pushed for full legalization of marijuana, but Biden’s objections are evidently deep. Instead, the recommendations creep closer to full legalization, in several steps.

Decriminalization. The federal government will reduce penalties for violation of marijuana laws. Fundamentally, the task force is seeking to end the War on Drugs. Other recommendations include “Automatically expunge all past marijuana convictions for use and possession” and “support increased use of drug courts and treatment diversion programs instead of incarceration.”

Rescheduling. Currently, marijuana is a Schedule I drug, meaning that it has no currently accepted medical use, and therefore is most restricted. This hardly makes sense, given that medical marijuana is now widely prescribed. Any lower schedule would allow more research and experimentation. Rescheduling can be done by the Attorney General.

Legalization of medical marijuana. This fits with the program of rescheduling. It would make medical marijuana legal in all 50 states. Currently, medical marijuana is illegal in only three thinly populated states. The more important aspect of this move would probably be to reduce the stigma associated with marijuana.

States make their own decisions about recreational use. In effect, this opens the door for states (also Washington DC) to legalize marijuana for adult use. This has the potential to vastly expand the market for recreational cannabis. What it does not legalize is interstate commerce, so cannabis companies would have to maintain the current fully-integrated business model they now have.

The Results

The big moves were in US-market cannabis companies, naturally, given the catalyst. (See chart above.) Some primarily Canadian-market companies did well in sympathy (CGC, TRSSF, ALEAF). A number of other cannabis companies showed smaller gains for the day (APHA, ACB, HEXO, RWBYF) and a few had losses (AYRSF, GRWG).

Cannabis ETFs are generally very poorly constructed (MJ, YOLO, MJJ, THCX, POTX, TOKE). None of these vehicles posted more than a gain of 3.5%, with most in the 2% range.

Two strong companies, Green Thumb and Trulieve, pushed decisively past recent resistance levels. This is not true of any other companies. From a technical perspective, I would expect greater upside and more limited downside for these two stocks.

Conclusion

Friday’s move across the cannabis sector—especially the US cannabis sector—shows what kind of results the sector could see, given relatively likely changes in the law. In other words, what is keeping this sector from exploding is the legal and regulatory environment. A Biden administration will likely loosen that environment considerably, and the next administration will probably loosen it even more. In the meantime, the looser regulations will be translating into increases on the top and bottom lines of companies.

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