Chuck Jaffe: Linking Super Bowl, stock market results is fool's game
BY CHARLES JAFFE Market Watch
Wednesday, February 06, 2013
2/06/13 at 3:21 AM
The Dow Jones industrial average was predicting that the San Francisco 49ers would win Super Bowl XLVII. They didn't, of course, and the Baltimore Ravens' victory is supposedly going to make the stock market index pay for its error in judgment.
Of all the hype that surrounds the Super Bowl, few things could be more ridiculous than trying to use various "indicators" and "predictors" to tie two completely unrelated things together.
It makes for fun conversation, but horrible investing. And although few people truly value the Super Bowl as an investment indicator, the truth is that many invest based on data, patterns and theories that are every bit as flimsy and dangerous - just less patently ridiculous.
There's a difference between seeing a connection or a pattern and having a cause that creates the effect. To see that difference and understand why it's critical to turning any theory into sound investment practice, let's delve into the big game - the stock market - and its ties to the Super Bowl.
The "Super Bowl Indicator" suggests that a triumph by a team from the old American Football League - now the American Football Conference or AFC - foreshadows a down market for the rest of the year, but a winner from the old NFL - now the National Football Conference or NFC - is a touchdown for the bulls.
The Super Bowl Indicator was right 28 times in 31 years from 1967 through 1997, then had a few bad years before coming back to the right side for the better part of the 2000s. Depending on whom you talk to and how they finesse the fine print, the indicator has been accurate about 75 percent of the time.
If an investment adviser was right that often, they'd be killing it in the market.
The indicator is goofy, and there are a lot of loopholes. The Ravens, for example, were spawned as the Cleveland Browns, an old NFL team, but they came into being well after the NFL-AFL merger and they were part of the AFC; the Browns were reborn through league expansion.
With the Ravens having won the game, you can say they're an AFC team and that the market should drop (as it did when they won in 2001). If the market works against them this year, however, an apologist could cite the original Browns' heritage as the cause.
If the Super Bowl sounds like a crazy way to divine the direction of the market, consider how strange it would be to have the market decide the outcome of the game.
There's a long-standing theory that the market predicts the game through its performance late in the NFL season and into the playoffs, so that if the Dow rises from the end of November until Super Bowl game day, the team whose name appears later in the alphabet will win.
The Dow was up over that time frame, which suggested that the 49ers would win.
As my friend Floyd Norris, a New York Times columnist, once put it: "Anyone foolish enough to bet on a game based on the stock market, or credulous enough to believe a football game can forecast the stock market, probably should hire a money manager, or a psychiatrist, or both."
Dig deep to find out why something works - to determine the causal relationship that links the theory and the market - and the explanation too often comes back "because it does." That's a telltale sign that the investment theory is poppycock.
"Over time, if you judged the results of these theories, they turn out to be pretty dismal," said Tom Howard, director of research for AthenaInvest.
"Humans like to make sense of the world around them, and they're constantly building stories, finding a few things that seem to fit together where they can say 'That's it,' " he said. "It doesn't matter that you can't find a relationship that explains the reason why something happens, it's just a pattern that fits nicely into the way our brains work."
Original Print Headline: Don't bet the market like it's the big game
Chuck Jaffe, senior columnist for MarketWatch, can be reached at email@example.com or at Box 70, Cohasset, MA 02025-0070.