Exxon Mobil (XOM) is one of the biggest companies. Its share price influences not only other oil companies but also the S&P 500 index itself. Here we introduce a simple share pricing model for Exxon Mobil, which foresees its price at a three months horizon. In a way this allows us to predict the market evolution and to beat the Efficient Market Hypothesis. The model is based on our concept of stock dependence on consumer price index. The intuition is simple and clear, the evolution of a share price is inherently related some goods and services and thus their relative prices. For example, one cannot deny that crude oil price has to affect share prices of oil companies. We have proved that such a link exists for ConocoPhillips (COP) and formulated an empirical model. For XOM, we use a set of 92 individual consumer price indices to select the best two CPIs to describe the evolution of the share price.
We have found several years ago that Exxon Mobil provides an example of a company with its share price leading/defining CPI components. Our model is seeking two CPI components from a large number of pre-selected ones, which minimize the difference between observed (monthly closing price adjusted for dividends and splits) and predicted prices for the period between July 2003 and February 2012. Our two-component model also includes a free term (constant) and a linear time term, which compensates well know linear (time) trends between various CPI components. The best-fit model is as follows:
XOM(t)= -1.70OFH(t-3) - 2.98RRM(t-10) + 22.73(t-1990) + 581.17, February 2012
where OFH in the index other food at home lagging the stock price by 3 months, RRM is the index of recreation reading materials leading by 10 months, (t-2000) is the elapsed time. Figure 1 depicts the evolution of both CPIs.
In the beginning of February 2012, this model predicted the monthly closing price of $89.0, i.e. a $10 increase from January's closing price. Figure 2 depicts the observed and predicted prices, the latter shifted three months ahead for synchronization, i.e. the predicted curve leads the observed price by 3 months. The actual monthly closing price in February was $86.5, i.e. $3.5 above that in January. Therefore, the model has correctly predicted the move in the price.
The model residual error is shown in Figure 3. It has standard deviation of $3.72 for the period between July 2003 and February 2012.
The estimated model shows that Exxon Mobil's share will be growing in 2012Q1 to the level of $90. This is in line with the increasing crude price.
Figure 1. The evolution of defining CPIs.
Figure 2. Observed and predicted XOM share prices.
Figure 3. The model error; sderr=$3.72.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.