Why Tilray's Plunge Continued Today

What happened

Shares of Tilray, Inc. (NASDAQ: TLRY) were 16.2% lower as of 3:13 p.m. EDT Monday. The Canadian marijuana stock soared in recent weeks, fueled in large part by what appears to have been a short squeeze. That short squeeze has now come to an end, with investors bailing out of Tilray as quickly as they piled on.

So what

Tilray has now lost around half of its market cap since last Wednesday. That's definitely bad news. However, it's important to keep in mind that the stock had also racked up a 228% gain in September alone prior to the beginning of the meltdown last week.

The reality is that little has changed about Tilray's business prospects this month. The company did enjoy some good news. For example, Tilray announced on Sept. 13 that it had secured approval to supply both cannabis flower and cannabis oil to Germany, becoming the first marijuana producer to win approvals for both types of products. However, this victory wasn't enough to justify Tilray's huge stock move.

What did change, though, was the level of anxiety felt by short-sellers betting on Tilray to fail. The more positive developments for Tilray, even seemingly inconsequential ones, the more heat short-sellers felt. As they covered their positions, it only added to upward momentum for the stock. Because Tilray's stock float of only 17.8 million is relatively small, the impact from this covering of short positions was like pouring gasoline on a fire.

Of course, sooner or later, the gasoline runs out. That's what happened as the number of short-sellers wanting to bail out of the stock dried up. And when there weren't many short-sellers left to cover their positions and drive Tilray's share price higher, the bubble burst. Today's decline merely reflects the continued repercussions of that bubble bursting.

Now what

The natural question for investors to ask now is, "How much lower can Tilray drop?" It's entirely possible that Tilray loses most, if not all, of the big gains that it generated in recent weeks. When investor sentiment turns on a stock, it can be brutal.

However, there are also reasons why Tilray's sell-off could end in the not-too-distant future. One is the opening of the Canadian recreational marijuana market in a few weeks. If that launch exceeds expectations, Tilray could easily bounce back. Another potential wild card is a partnership with a major company outside of the cannabis industry.

Then there's perhaps the most likely scenario that could fuel another round of soaring for Tilray. As the stock sinks like a brick, some short-sellers could be tempted to short Tilray yet again. If enough of them do so and Tilray benefits from some more good news, we could see history repeat itself.

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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.