The Super Bowl Indicator

02/05/08 08:18:00 AM

by Mike Carr, CMT

Should stock market investors care about who wins the National Football League's championship game?

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Position: N/A

Market movements can be predicted by who wins a football game according to popular wisdom. The Super Bowl indicator is based on the idea that if a team from the old American Football League (now the AFC division) wins the Super Bowl, the market will decline over the next year. Conversely, a win for a team from the old NFL (now the NFC division) means the stock market will be up for the year.

The first question to address is whether the popular wisdom withstands the scrutiny of testing. Bespoke Investment Group reported on this question and the indicator is surprisingly successful. A team from the AFC has won 20 of the 41 games. In years when these teams won, the market was up 60% of the time and showed an average gain of only 1.9%, well below the average return of 10% a year the market delivers over the long term. Wins by NFC teams were followed by an average gain of 13.2% and the market was up in 86% of the years after an NFC win.

Trading system developers would certainly be happy with results like this, but would be hard-pressed to explain the logic underlying the system. After much thought, Mike Epstein, now a visiting scholar at the Massachusetts Institute of Technology after a storied career as a Wall Street floor trader and executive, came up with an explanation for this indicator.

Epstein points to the overall economy as the reason the Super Bowl indicator works. Old NFL teams, such as the Chicago Bears and Cleveland Browns, are Rust Belt cities with economies dependent upon manufacturing. The upstart AFL, when it began playing football in the 1960s, placed franchises in booming cities dependent upon the new economy — oil in Houston, technology in Oakland — or whose owners had new-money fortunes like the Hess family, which owned the New York Jets.

When the old economy does well, fans in those cities have good jobs and feel good about their prospects. They fill the stadiums of the home team, and fill the coffers of their teams with cash needed to sign great players to win the Super Bowl. As the new economy does better, we see their teams dominate the NFL, and the manufacturing companies that dominate the Dow Jones Industrial Average do worse, resulting in a bad year for stocks.

So the Super Bowl indicator works, and is supported by logic. It is everything an indicator is meant to be.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."