Marijuana stocks are hot again.

As share prices rise, the crowd gets more excited. Once again, the belief is spreading that all one has to do is to buy the hottest marijuana stocks and cash in.

This could not be further from the truth. Investors are forgetting that marijuana stocks can be very volatile. When I wrote “How to potentially become a marijuana millionaire, albeit carefully,” the most important word in the headline was “carefully.”

Some will make millions in marijuana stocks, but many more will lose their shirts. Let’s examine this issue with the help of a chart.

Chart

Please click here for a chart comparing marijuana stocks Aphria APHA, +10.81%and Tilray TLRY, +4.90% Please note the following:

• The chart shows when the Arora buy signal was given. Using Arora Trade Management Guidelines, the average buy price was $4.21. Hindsight shows that the buy signal was given close to the bottom. Aphria is trading at $10.67 as of this writing.

• The reason the chart compares Aphria with Tilray is that the Arora call was to buy Aphria and sell Tilray for the medium term. Please see “Buy the previous ‘don’t touch’ marijuana stock and sell the darling.” At that time, Tilray was the darling and everybody was selling Aphria. My call was an unpopular contrary call.

• The chart shows that the contrary call made a 143% performance difference in a short time.

• Aphria is moving up on hopes of a higher buyout offer.

• Cronos CRON, +13.90% is one of the strongest marijuana stocks as of this writing. Interestingly, The Arora Report made a call to buy Cronos just before it received a major investment from cigarette maker Altria MO, -0.47% This call produced large gains in a very short time. The call to buy was made at $9.41. Cronos is trading at $22.41 as of this writing.

• In addition to Cronos and Aphria, there are several marijuana stocks in our diversified marijuana portfolio. They include Canopy Growth CGC, +1.76% and New Age Beverages NBEV, +3.08% Please see “If you buy only one marijuana stock, this should be it.”

• Marijuana stocks have once again become uncorrelated to the Dow Jones Industrial Average DJIA, +0.42% S&P 500 ETF SPY, +0.49% and Nasdaq 100 ETFQQQ, +1.05%

Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.

The real reason behind the runup

The real reason behind the recent runup in marijuana stocks is a short squeeze, according to the algorithms at The Arora Report. In a short squeeze, investors who previously sold short are either forced to buy to cover their shorts or feel compelled to buy to cover at higher and higher prices. Such buying is artificial buying and not real buying based on fundamentals. In the stock market, there are not many things we know with certainty. However, we know with certainty that short squeezes eventually end. When they end, then the stocks fall.

Money flows

Segmented money flows give you the biggest edge. They help you not only make money but also stop you from becoming bag holders at the hands of insiders as well as pumpers-and-dumpers.

As of this writing, money flows show that the momo crowd is aggressively buying marijuana stocks. However, the smart money is not buying, and even selling, on “up” spikes. To learn about segmented money flows, please see “How ‘peak good news’ for marijuana stocks may undermine investors.”

Please click here for a previously published chart of segmented money flows on 15 marijuana stocks including Aurora Cannabis ACB, +8.33% Constellation Brands STZ, -0.85% and marijuana ETF MJ, +4.60%

What to do now

Those who are aggressive and holding marijuana stocks may consider continuing to hold core positions but take partial profits on the rest.

Those who are holding positions larger than the core positions or trade-around positions may consider taking partial profits.

Those who are growth-oriented and holding marijuana stocks may consider slightly trimming core positions at the edges by taking partial profits.

Those not in marijuana stocks may consider waiting patiently for signals to buy select marijuana stocks.

Arora’s 14th Law is directly applicable in this situation: To be successful at investing and trading, become a master of position sizing. Position sizing is critical to investing in marijuana stocks. In addition, using techniques such as trade-around positions is especially important.