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Everyone Is Reading This Remarkably Accurate Indicator Wrong

Every year, serious market analysts explain that the Super Bowl indicator is a myth because football games have nothing to do with the economy. Despite the solid track record of the indicator, they argue that "correlation is not causation." If they would dig a little deeper, though, they would see that there is a logical explanation for the Super Bowl indicator, and who wins the game actually does have something to tell us about the economy and the stock market.

According to the indicator, if a National Football Conference (NFC) team wins the Super Bowl, the stock market will show a gain for the rest of the year, while an American Football Conference (AFC) team victory is bearish. The data show that there could be something to this theory and the stock market does tend to underperform after an AFC victory like we saw this year.

Prior to this year, the NFC has won 25 of the 46 games. Stocks showed gains in 80% of those years and the average gain of the S&P 500 index was about 10.4%. After an AFC win, the stock market has shown an average gain of 3.4% and has been up 62% of the time. Overall, the index has been up in 72% of the years since the first Super Bowl with an average gain of 7.2%, so there is a tendency toward outperformance after an NFC victory and underperformance after an AFC win.

At first glance, the indicator could be interpreted as bearish this year after the AFC Baltimore Ravens won. That's certainly what everyone is saying this week. But the logic of the indicator actually suggests that Baltimore's win is bullish.

The reason the Super Bowl indicator works lies in football history. The National Football League (NFL) was formed in 1920, and consisted of teams in East Coast and Midwest industrial cities like Chicago and Detroit. By 1960, new owners who couldn't get NFL teams started the American Football League (AFL). This group included owners who had made their fortunes in the new economy with technology or oil.

Considering the roots of the NFL, the Super Bowl winner does give us insight into the state of the economy. The winning team is generally doing well financially, selling tickets and generating revenue that can be used to sign the best players. If an NFC team wins, it could be argued that it means the industrial cities from the old NFL are doing well economically and the victory signifies that we should see gains in the Dow Jones Industrial Average (DJIA) and other major indexes. An AFC win shows that traditional industries might be struggling and a substandard stock market performance should be expected.

Regardless of the Ravens' current status as an AFC team, Baltimore is an old NFL city and is a symbol of the old economy. Success in Baltimore should be a sign that the national economy is recovering. In this week's market outlook, I highlighted the turnaround taking place in the economic data. The Super Bowl indicator obviously should not be a sole reason to trade, but it can offer valuable input that helps confirm what we're seeing in other data.

The monthly chart of the DJIA below shows stocks might be starting an extended up move. The chart is compressed to show data back to 1987. Stochastics is overbought and this indicator tends to remain overbought for years at a time after reaching this level. In addition, Moving Average Convergence/Divergence (MACD) turned positive in January and, on average, this indicator remains bullish for 16 months after a signal.

DJIA Chart

A rapid change in momentum indicators is possible, but odds favor gains on the monthly chart. Combined with the January indicator, another bullish omen for the stock market that says stocks tend to outperform from February through December after a gain in the first month of the year, and the logical interpretation of the Super Bowl indicator, we have multiple bullish signals for the rest of 2013.

View dips as buying opportunities as the stock market appears to be at the beginning of an extended bullish move.