If you’re looking for a stock market indicator that has an 80 percent success rate in forecasting market direction, just wait until the big game is over next Sunday. The so called “Super Bowl Indicator” has been around for a long time.
If you’re a stock market bull and you follow this indicator, you should be rooting for the Seahawks this weekend. A Peyton Manning victory could be bad news for the stock market.
The way the Super Bowl indicator works is simple. First step is to check the score of the Super Bowl — if a team from the old NFL (NFC) wins the Super Bowl, the Dow Jones Industrial Average should have a good year. If a team from the old AFL (AFC) wins, that is a bad omen for the market.
Super Bowl I was played in 1967, and since that time the indicator has worked 80 percent of the time — it has been accurate on 37 out of 46 occurrences. Before 1997, it was correct 28 out of 31 times.
So, this year a Broncos win might be bad for the market, where a win by the Seahawks should be considered to be a good sign.
Whether you’re a Broncos fan or a Seahawks fan, I wouldn’t advise letting the outcome of the game determine your investment strategy. You may hear a lot about the Super Bowl Indicator, but I wouldn’t take it too seriously.
Indicators like this are examples of what’s known as “spurious correlation,” which means that even though the success rate of this so-called indicator is remarkable — it is also purely coincidental.
A good way to put it is that correlation does not imply causation, so even though we see evidence of correlation, it doesn’t prove that the outcome of a football game has any direct influence on stock market returns.
There are other examples like this for the market — another is the so called “hemline indicator” first presented by economist George Taylor in 1926. The theory suggests that hemlines on women’s dresses rise with good economic times and fall when the economy turns sour. Recent research from 2010 shows that the hemline indicator is still valid.
My advice is to enjoy the game, root for your favorite team and don’t let the outcome of a football game or the length of someone’s dress determine your investment strategy.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information on his money management service can be found at his blog at www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.