3/15/12

JPMorgan Chase & Co.: a negative correction is not excluded

Here we present a tentative model for the evolution of JPMorgan Chase & Co. (NYSE: JPM) stock price. JPM is a company from financial sector which provides various financial products and services worldwide. The model has been obtained using our general concept of share pricing as based on a decomposition of a share price into a weighted sum of two consumer price indices. Our main assumption is a natural one – all goods and services produced (provided) by a given company should define the share price evolution relative to other companies. In other words, relative pricing power of the company is related to the pricing power of its G&S. Since other companies are also driven by prices for their goods and services, which compete with the studied company, one need two defining sets of G&S to estimate the relative pricing power. Presumably, the studied share price can be defined by two CPIs.


The best CPIs are selected from a set of 92 CPIs with estimates available from 2000. The best fit (in the LSQ sense) consumer price indices are that of food and beverages (F) and the index of owner’s equivalent rent of residence (ORPR). The defining time lags were as follows: the food index led the share price by 5 months and the TS index led by 4 months:

JPM(t) = -1.99F(t-3) + 1.15ORPR(t-2) + 6.81(t-1990) + 39.30, February 2012

where JPM(t) is the JPM share price in U.S. dollars, t is calendar time.

Figure 1 displays the evolution of both defining indices since 2002. Figure 2 depicts the high and low monthly prices for a share together with the predicted and measured monthly closing prices (adjusted for dividends and splits). The predicted prices are well within the bounds of the share price uncertainty and lead by 2 months. However the measured price volatility is much higher than the predicted one. This means that large deviations from the predicted level are possible but such excursions are always ended on the predicted curve. One can use this observation for a qualitative forecast of price movements.
It should be noted that here we present a tentative model which is fresh and needs to be validated by new data.
The model residual error is shown in Figure 3 with the standard deviation between July 2003 and January 2012 of $2.84. It is not excluded that the share will have a negative correction in April/May.

Figure 1. The evolution of F and ORPR indices

Figure 2. Observed and predicted JPM share prices.


Figure 3. The model residual error: sterr=$2.84.

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