The Super Bowl indicator is a theory wherein we can predict the stock market's year-end closing price based on which conference wins the Super Bowl. The theory claims that if the NFC team wins the stock market will finish the year higher, and if the AFC team wins the market will finish lower. Most of the traders I know are highly logical and analytical and are quick to dismiss the theory as hokum and of course they are right. I think. Oddly the Super Bowl indicator has an 80% success rate.
Correlation, however, does not equal causation, at least that's what I tell myself when confronted with this type of nonsense. I mean I think it's nonsense. I mean of course it's nonsense...right?
In the name of science, and in order to fight boredom on a slow day, I consulted some of the brighter minds in my trading circles to determine if there's any possible thread of causation we could dig up. Half of them told me to go away. The rest of us then set out to brainstorm for any possible buttress to support the theory. Here's what we came up with.
Theory 1: Big City Effect
Of the ten most populace cities in America eight are represented by an NFL team. Six of these eight cities have a team in the NFC and three have an AFC team (New York has one of each). I'm intentionally not counting Los Angeles as having an AFC team because the Chargers have only very recently been added. Is it reasonable to assume that big city teams have a larger fan base and a greater potential for a lingering celebratory effect? I suppose the answer to that is yes, but it seems like it would be miles away from having enough significance to swing the stock market.
It is also reasonable to assume that the average fan in cities like New York, Chicago and Los Angeles probably has more money to celebrate with, but unfortunately it doesn't seem like those cities are historically dominant in Super Bowls.
Theory 2: NFC Tradition
The second thing we discussed is that NFC teams may have a larger and more deep-rooted fan base that's independent of the size of the city they represent. The NFC is the remnants of the original NFL that began in 1920. The AFC came from the American Football league which began in 1960. In 1970 the leagues merged creating the current NFL.
Maybe there's a sense that all is in balance when an established team from the original NFL wins the Super Bowl instead of a rogue upstart from the AFL. The problem with that argument is that there has been movement between the leagues over the years that has made tracing lineage more confusing.
Conclusion: A Big Industry, A Neat Trend, But...
At the conclusion of our task force meeting we all pretty much agreed that if there is a compelling reason why the Super Bowl effect exists we cannot find it. We also agreed that if the Bears won the Super Bowl we would probably spend a decent amount of money on jerseys and other paraphernalia for ourselves and our families. The NFL is a 15 billion dollar a year industry that also has a tremendous impact on regional economies so it is always a good idea to analyze trends. Sadly, I have to give up on this one.
A Better Indicator
A better indicator to watch is what's commonly called the January barometer. This theory states that if January is a positive month for stocks the overall market will finish the year higher. This has proven correct 80 percent of the time since 1929. Conversely, if January ends with the market lower, then the overall market will end the year negative. This has proven correct 44 percent of the time in the same period. The January barometer makes more sense to me in that it's probably an indicator of investor psychology and sentiment looking out at the coming years.
My takeaway is that this type of indicator along with "sell in May and go away" and several others probably have some validity. I think they should be something we watch. My plan is to collect all the data and trade based on many different indicators and not assign too much value to any one.
Written by Jim Iuorio. Read more from the author here.
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