What happened

Pop!

Might that great sucking sound, that we just heard, the noise of the marijuana stock bubble finally popping? After two full weeks of incredible gains, shares of two of the best known pot stocks, Canopy Growth (CGC 2.41%) -- up 194% from Aug. 30 through last night's close -- and Aurora Cannabis (ACB -0.15%) -- up 106% -- are taking dramatic tumbles Wednesday morning, down 15.7% and 21.9%, respectively, through 10:35 a.m. ET. And cannabis producer Cresco Labs (CRLBF 5.13%), up a similarly astounding 91% through last night, is giving back 6.2%.

The question is why?

So what

So let me see if I can lay that out for you.

By now you know the situation in the marijuana market currently:

  • Two weeks ago, on the aforementioned Aug. 30, the U.S. Department of Health and Human Services (HHS) told the U.S. Drug Enforcement Agency (DEA) that it thinks marijuana should be downgraded from a Schedule I narcotic to a mere Schedule III drug (similar to steroids, testosterone, and codeine, and thus easier to access for medical purposes).
  • After years of opposition, President Biden has also declared his public support for legalizing medical marijuana.
  • The U.S. Congress is also preparing to make it easier for marijuana businesses to access banking services, as it prepares a Secure and Fair Enforcement (SAFE) Banking Act for a floor vote.

In short, all across D.C., the federal government is taking baby steps toward marijuana legalization. Marijuana stock investors have recognized this trend, they're happy about it, and they've been buying marijuana stocks to capitalize upon it -- but now here come the monkey wrenches aiming to derail the process.

Yesterday, a group of 14 U.S. senators and representatives sent a letter to the DEA urging the agency to "reject" HHS's recommendation to ease regulation of marijuana. As Marijuana Moment reported, the legislators argue that "research, science, and trends support the case that marijuana should remain a Schedule I drug" because of its "high [and] increasing ... potential for abuse."  

Now what

Mind you, these legislators are in the minority. In the U.S. Senate for example, at least 40 co-signers to the SAFE Banking Act seem sufficiently assured of marijuana's safety that they're willing to support letting bankers make loans to marijuana businesses, accept marijuana cash for deposit, and so on. Pundits predict the SAFE Banking Act will sail through the Senate with at least 60 votes, and go on to be passed by the House as well -- which has already voted in favor of similar legislation several times in the past. Logically, it seems likely that the DEA will side with the majority on this one -- especially with HHS giving it political cover.

Even if that's how things play out, though, marijuana companies' troubles may not be over.

In California, and in the U.S. House of Representatives as well, moves are advancing to allow medical research into psychedelics as an alternative to marijuana. And while the House proposals seem rather limited in scope, California has simultaneous initiatives to both broadly legalize psychedelics, and also to raise $5 billion in government funds for "psychedelic therapies for mental health," as Marijuana Moment also reports.

So what does all this mean for marijuana investors? Legalization still seems to be the way the winds are blowing, not just at the state but also at the federal level. That's the good news. But the bad news is that legalization may not stop with marijuana. At the rate things are changing, we could soon see psychedelic drugs legalized for medical purposes as well -- creating more competition for marijuana stocks.    

Just what these three still-unprofitable companies needed: More competition. Sigh.