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A raging success

Why one Alberta junior E&P company has been hitting it out of the park. Also: Are we near a market top? The evidence says....

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Mar 13, 2014

by Max Fawcett

It’s been a tough slog over the last few years for most publicly-traded junior energy companies. But Raging River Exploration (TSXV:RRX) is one of the exceptions, and its shares are up 120 per cent over the last 12 months. At the FirstEnergy conference in New York, CEO Neil Roszell talked about the source of the company’s success. “The stock performance has absolutely been driven by organic growth,” he told BNN. “We’ve had great success with the drill bit, and growth per share on a production basis and cash flow basis matters.” Given that Roszell and his management team have built and sold five companies in the past, with the most recent two being sold to Crescent Point Energy, it makes sense to expect a similar outcome for Raging River. “We never know where that finish line ultimately is,” Roszell said, “but that’s what we’re building toward.”

Meanwhile, for those wondering if the market is nearing a top – that is, almost everyone – Barry Ritholtz had an interesting piece over at Bloomberg View that’s worth reading. In it, he explores the research done by Paul Desmond, the chief strategist and president of Lowry’s Research, which identified the key factors in a market top. First, there’s the divergence between the number of stocks making new 52 week highs and the index itself. “When a major index such as the S&P 500 is making new highs but the number of SPX stocks making 52-week peaks begins declining, that divergence is a significant warning sign,” Ritholtz writes. “Desmond notes that this can warn of an eventual top as much as a year ahead of time.”

Second is a narrowing of market breadth, or the number of stocks participating in the rally. “When tops occur, we see extreme selectivity – fewer and fewer stocks are pulling the market upward. We saw a classic example in the ‘Nifty Fifty’ during the 1960s, and again in the dot-com bubble with a handful of leading stocks driving the Nasdaq,” Ritholtz writes. Third is a divergence in the performance of small- and medium-cap versus large-cap stocks. “The bottom 50 per cent of the market by cap size will begin to falter first, while the rest of the market appears healthy. The mid-caps – the next 35 per cent or so of equities – will falter four to six months before the high. The tendency for big-cap-dominated indices to peak last is a function of their structure. They are market-cap weighted and therefore can be dominated by a handful of mega-caps.” Given this tendency, investors might be wise to watch the performance of some of the fundamentally indexed ETFs, which are weighted using criteria other than market capitalization. If they start to diverge from the cap-weighted index? Watch out.

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Finally, there’s the proportion of stocks that are in their own bear market, down 20 per cent from their recent highs. “During healthy bull markets, less than 10 per cent of stocks are in this condition,” Ritholtz writes. “As the small-caps and mid-caps roll over, this percentage will increase. At the market peak, we typically see one-fifth of stocks in their own bear market.” Now, the real question: how does current market look when assessed using these criteria? Not bad, Ritholtz says. “What does all this mean for the current run? According to Lowry’s, ‘the weight of evidence continues to suggest a healthy primary uptrend with no end in sight.’ For those concerned with a market top, that is rather bullish.”

 

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