The common fear among investors right now is that the exuberant finish for the TSX last year has left equity markets overextended, setting up for a nasty pullback in 2011.
The TSX rose a not-so-shabby 19 per cent in the last half of 2010, the third-best in the last 55 years.
But if history is a guide, there may not be so much to worry about after all.
UBS strategist George Vasic has crunched the numbers and discovered that whenever the TSX composite has had a gain of greater than 10 per cent in the second half of a year, its performance the following year has been substantially better. Specifically, the TSX posted a median rise of 13 per cent for the full year in these instances, more than double the typical rise when the previous second half was an average or negative performing period. He looked at data covering the past 92 years; the TSX posted a median second-half gain of 4.2 per cent over that period.
And the probability of rising was also stronger, with a 74 per cent to 81 per cent likelihood of a positive January, first quarter, first half and full year - against 56 per cent to 64 per cent - when the previous second half was not strong, he said.
The story gets even juicier when one considers that 2011 is year three of the U.S. presidential cycle - which Mr. Vasic notes is a particularly relevant factor right now as policy remains strongly oriented to reducing unemployment.
In all third years of the election cycle, the TSX rose an average of 12 per cent, jumping to a median of 18 per cent when preceded by a strong second half. The only two times (out of 22) the TSX has been down in a year three is when it declined in the previous second quarter.
"While tactical fears can be justified, the bottom line is that we believe the trend is your friend in the current circumstances," said Vasic.
Alcoa Inc.'s financials are expected to show modest improvement when the company reports its fourth-quarter results after the markets close on Monday, but according to RBC Dominion Securities Inc. analyst Fraser Phillips, that doesn't mean its share price is going to see a sustained uptrend any time soon.
The aluminum market, he contends, will continue to suffer from significant excess inventory and capacity, constraining prices for the commodity and "limiting any upside potential for the share price over the next 12 to 24 months."
He expects quarterly earnings per share of 18 cents (U.S.), just shy of the consensus on Wall Street of 19 cents. That's well ahead of the penny EPS reported for the year-ago quarter.
Alcoa has released guidance suggesting there will be a 150,000-tonne increase in alumina production in the fourth quarter from the third, but Mr. Phillips said this will be offset by adverse currency movements. And while improving business conditions are being seen in the Flat Rolled Products and Engineered Products and Solutions units, the fourth quarter is a seasonally weak period for those downstream sectors.
Downside: Mr. Phillips has a $15 price target on Alcoa and rates the stock as a "sector perform."
Lumina Copper Corp. announced "very impressive" results from the first three of four holes drilled as part of its 2010 exploration program on its 100 per cent owned Taca Taca copper-gold-molybdenum project in Argentina, noted Raymond James Ltd. analyst Tom Meyer. Results included intercepts of 244 metres grading 1.36 copper equivalent.
"In our opinion, the impressive drill results confirm the prospectivity of the Taca Taca project and the merits of the company's intention of pursuing a 43,000-metre drill program, among other project specific initiatives, in 2011," he wrote in a research note.
Upside: Mr. Meyer sharply raised his six- to 12-month price target to $8.50 from $2.50 and upgraded his rating to "strong buy" from "market perform."
Darcy Keith