Of all the idiotic predictors of market performance (and I would argue that nearly all of them are idiotic: predicting the future direction of the stock market as a whole is darn near impossible), the Super Bowl Indicator has to be the dumbest.
Here's how it work: When an "original" National Football League team wins the big game, the market rises; it falls when the winner is a team that joined the NFL in the merger with the American Football League in 1970. The indicator has an 81% success rate historically.
So if the Patriots win the Super Bowl, that's a bad omen.
The Wall Street Journal devoted an article to this nonsense today [subscription], without any hint of irony or explanation of how incredibly dumb this indicator is.
In short, the Super Bowl indicator seems legitimate only because it has worked so well in retrospect, but of course there's no real mechanism for it to continue to work. The winner of the Super Bowl has no impact on corporate earnings, fed policy, or any of the unpredictable factors that drive the market in the long run.
In order for an indicator to have value, it has to have more than just a historical correlation. There are an infinite number of "indicators" that can be back-tested to see how well they "predict" market prices. It's no surprise that some will appear to have good track records. Researchers McQueen and Thorley scoured through the data to find an index that has the strongest historical correlation with the performance of the S&P 500. You guessed it: butter production in Bangladesh.
The point is, ignore the Super Bowl Indicator and any other form of technical analysis that has a strong historical correlation with returns unless you can figure out why it would continue to be a good predictor.
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Reader Comments (Page 1 of 1)
1-29-2008 @ 2:57PM
michael schneider said...
True! The Super Bowl indicator has more value as a "poster child" for spurious indicators- many of which are really taken seriously- than as a predictor of the market. It does illustrate a possible analytic trap though.