First Solar: A Good Test For Technical Analysis

In April (here) and November of 2010 (here) and again yesterday (here), analysts have been warning investors to short solar, particularly First Solar (FSLR). The consensus appears to be that political problems threaten solar subsidies, technological problems threaten existing production processes and competitive pressure is forcing the smart money to leave solar. Since the average investor can't beat the smart money, it's time to be short FSLR.

Reading the political, technical and market analysis is enough to make me queasy. Interestingly, my best forecast paints a different picture (with a lot of uncertainty). Watching FSLR over the next few years could be an interesting test case of whether statistical methods are adequate for investment analysis.
The graphics above displays my stock forecast for FSLR. The best model, selected using the AIC criteria, showed the FSLR stock price being driven by the state of the world economy. The forecast is for positive future growth.
The attractor model (displayed above) is also driven by the world economy and produces a similar forecast. The attractor model also suggests that the price peak in 2008 was driven by an investment bubble.

The problem with the forecast is that there is not much differentiation between competitor models (the random walk, the business-as-usual model or the models using FSLR volume or the state of the US economy as input variables). The confidence intervals around all the AIC statistics (created by bootstrap resampling) are all within the same range, 266 to 280. In other words, even though the AIC criteria will select a model, we can't be very sure it's the right model.

In spite of a positive forecast, the statistical results suggest not investing in FSLR simply due to uncertainty. It will be interesting to follow the stock and see where it goes over the next year.