|As the big game approaches, many stock market commentators will be talking about the Super Bowl Indicator. This indicator is simple -- if an old National Football League (NFL) team wins the big game, the stock market will close up for the year; a win by an old American Football League (AFL) team indicates a likely down year for stocks. This year the New York Giants, an old NFL team, will face off against the New England Patriots, an original AFL team.|
|Some old traders believe that the state of the economy can explain why the Super Bowl indicator could work. The late Mike Epstein, a trader and later a research affiliate at the Massachusetts Institute of Technology Lab for Financial Engineering, summarized the logic behind the Super Bowl Indicator. He noted that the old NFL teams, which included the Chicago Bears, Pittsburgh Steelers, and Cleveland Browns, are Rust Belt cities where the economies are dependent on manufacturing. On the other hand, the AFL, when it formed in the late 1950s and early 1960s, awarded franchises to booming cities that represented the new economy. Oakland was a technology center and home to the Raiders, and East Coast technology hub Boston became home to the Patriots in the new league. |
When the old economy does well, fans in those cities have good jobs and they pack the stadiums of their home team, filling the bank accounts of the teams with the cash needed to sign great players that can bring a Super Bowl victory. If the new economy is faring better, teams in those cities become the home of the most expensive players and are the winners. Manufacturing companies are the symbols of the Rust Belt economy and these companies dominate the Dow Jones Industrial Average (DJIA). A healthy manufacturing economy boosts both the teams of the old NFL and the DJIA.
|The first question to address is whether the Super Bowl Indicator holds up to testing. In the spring 2010 issue of "The Journal of Investing," George Kester demonstrated that the indicator worked over the long term but has been less effective in recent years. Figure 1 shows that the returns have declined while volatility has increased over the past 20 years. The indicator works because its performance was so strong in the first 20 years.|
|FIGURE 1: SUPER BOWL SUMMARY. A summary of the Super Bowl indicator shows that the performance has degraded over the since 1988.|
|Graphic provided by: The Journal of Investing.|
|Another indicator has held up well to testing over time. The "First five days of January" indicator shows that if the Standard & Poor's 500 goes up over the first five days of the year, the market closes higher about 85% of the time. This indicator was introduced by Yale Hirsch in the annual "Stock Trader's Almanac." For comparison, the stock market closes higher about 75% of the time.|
|FIGURE 2: S&P 500. The S&P 500 is bullish under the "first five days of January" indicator.|
|Graphic provided by: Trade Navigator.|
|Combining the two ideas, we should be able to forecast the Super Bowl winner based on how stocks perform in the first five days of January. Stocks were up in the first five days of 2012, so we should expect an up year in stocks. If the year closes higher, an old NFL team should win the Super Bowl. The Giants are the old NFL team playing this year, and the early betting line shows them to be three-point underdogs. Based on the stock market, the Giants should be a winning bet, even without the points.|
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