Random Stock Walking is a form of technical analysis. On Mad Money tonight, CNBC analyst Jim Cramer did a good job of analyzing the stock OCLR (Oclaro, Inc.) using charting concepts, another approach to technical analysis. In this post, I'll compare the two approaches.
Oclaro, Inc. is a provider of optical network components. Cramer thinks that the stock has a bright future given the future of telecommunications and the lack of competitors. Cramer also thinks that both the fundamental and the technical analysis support the positive forecast.
In the video above, Cramer presents a technical analysis that uses some of the following concepts: trend lines, head and shoulders, and relative strength index. As a statistician, I'm not sure what to make of chartist concepts. Here's a start on that project.
From the standpoint of random stock walking, OCLR is a stock that is hard to distinguish from a random walk. The business-as-usual model (OCLR[t] = 0.49 + 0.85 OCLR[t-1]) with 98% confidence interval [0.70, 0.85, 0.94]) shows that a random walk is somewhat improbable. The graph above displays the dynamic attractor for the model. Notice that 2006 to 2010 draws most of Cramer's attention with a lot of weight being given to the "break out" after 2010.
Given a dynamic attractor that is below the current stock price, it's not surprising that my future forecast is not very encouraging. There aren't many analyst opinions on this stock (here) and the one analyst opinion available suggests a high price target of 23, which is about the upper 98% bootstrap prediction interval for the stock.
The Random Stock Walker approach finds little evidence for a "sky-is-the-limit" breakout that Cramer's technical analysis is suggesting. It will be interesting to follow this stock over the next few years and see where it goes. Cramer does admit that it is a speculative stock.
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