Six months ago we reported a share price model for Alcoa (AA), which is company from Materials subcategory of the S&P 500 list specialized in aluminum. Here we test and update the model using new data, including the monthly closing price in September 2011 and the estimated CPI components for August. The principal result is that we accurately predicted the behavior in Q2 and Q3 and the updated model has the same defining CPI components and time lags with slightly shifted coefficients. Therefore, the model is a reliable tool to predict the evolution of Alcoa at a two month horizon.
According to our general approach to share price modeling we decompose the observed time history of the monthly closing AA stock price (adjusted for splits and dividends) into a weighted sum of two CPI components, time trend and free term. Two defining CPI components are selected to minimize the model (RMS) error and may lead or lag behind the share.
The original and current AA model is defined by the (not seasonally adjusted) index of food away from home (SEFV) and the price index of rent of primary residence (RPR), as reported by the US BLS. The former CPI component leads the share price by 2 months and the latter is 4 months ahead of the share price. Figure 1 depicts the overall evolution of both involved indices through August 2011. It seems these indices have been evolving in sync since 2002 with the only step-like change in the SEFV index in 2008. We present two empirical models as estimated in April and October 2011:
AA(t) = -6.71SEFV(t-2) + 3.34RPR(t-4) + 19.23(t-1990) + 298.87, Aril 2011
AA(t) = -6.61SEFV(t-2) + 3.22RPR(t-4) + 19.51(t-1990) + 300,89, October 2011
where AA(t) is a share price in US dollars, t is calendar time. Figure 2 illustrates the observed and predicted models for October 2011. The residual error is $3.04 ($3.12 in April) for the period between July 2003 and September 2011. Figure 2 also shows monthly high and low prices as the uncertainty in the monthly closing price as the best share price estimate. Since the closing price has to characterise the whole month by one value the high and low prices might serve as statistical bounds.
One can expect the share price to fall to the level of $5 in December 2011.
Figure 1. Evolution of the price of SEVF and RPR.
Figure 2. Observed and predicted AA share prices.