What happened

Shares of Tilray Inc. (NASDAQ:TLRY) had skyrocketed 29.6% higher as of 3:37 p.m. EST on Wednesday. The Canadian marijuana stock's big jump followed results from U.S. elections on Tuesday that were generally positive for the cannabis industry.

In particular, Michigan voters passed a measure legalizing recreational marijuana in the state. Missouri and Utah passed ballot initiatives to legalize medical marijuana. With Democrats gaining control of the U.S. House of Representatives, the chance of federal marijuana laws changing also appears more likely now. 

Legal marijuana signs

Image source: Getty Images.

So what

None of the U.S. election news affects Tilray immediately. So why the huge gain?

With Tilray's low stock float of roughly 10 million shares and a relatively high short interest, any good news is likely to result in a big price swing. As short-sellers cover their positions, it creates upward pressure on Tilray's share price. A low float makes this upward pressure even more intense.

Over the longer term, however, the U.S. election results could bode very well for Tilray and other Canadian marijuana stocks. Democrats in the U.S. support marijuana legalization at significantly higher levels than Republicans do. It's quite possible that the House of Representatives will advance legislation next year to change existing federal marijuana laws.

Of course, the U.S. political system requires both legislative chambers to approve a bill, and for the president to sign it into law. The GOP increased its number of seats in the Senate. But with two-thirds of U.S. states having passed measures to legalize marijuana in some form, the Senate just might go along with the House on marijuana reform. And President Trump has already indicated that he would be likely to support legislation that leaves marijuana laws up to the states.

Should federal laws in the U.S. be changed in a way that recognizes the legality of marijuana, Tilray would have an opening to move into the massive U.S. market. That market will be even bigger than before, especially with Michigan voting to legalize recreational marijuana. 

Now what

It's now a waiting game to see if anything really happens that will directly benefit Tilray. Don't be surprised if the stock experiences significant volatility in the meantime.

The clock is also ticking for Tilray's initial public offering (IPO) lockup period to expire on Jan. 15, 2019. As of that date, insiders can sell their shares. With Tilray's market cap at an astronomically high $12.6 billion, it would make sense for insiders to sell plenty of stock to lock in profits.

Tilray could be in great shape over the long run if the U.S. market opens up to it. In the short term, though, this is a pricey stock that could fall as quickly and as dramatically as it has risen.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.