Indicator of the Week: Did Tom Brady Just Doom the Dow?

A lesson in randomness and stock returns

Senior Quantitative Analyst
Feb 8, 2017 at 7:00 AM
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Congratulations to the New England Patriots, winners of the Super Bowl last weekend. Unfortunately for investors, the renowned Super Bowl stock market indicator is now forecasting underperformance. Historically, stock markets have underachieved when the AFC team wins the Super Bowl. The numbers are broken down in the table below.

dow super bowl returns

Despite the data, I doubt anyone is adjusting their trading strategy based on the outcome of the big game. It is nonsensical to think a football game can affect the stock market. Because it's so ridiculous, we don't have to think a whole lot to know the results happened like that simply due to randomness or, in other words, just by accident. Results like that should be a reminder to look skeptically at other stock market statistics we see, even ones that seem more reasonable.

Can Stock Symbols Affect Returns?

Here's another absurd study. It looks at the returns over the past three years of S&P 500 Index (SPX) stocks based on the second letter of their stock symbol. I'm using the second letter because I've heard a theory that, during bull markets, stocks starting with a letter near the beginning of the alphabet may tend to outperform, since investors often see lists in alphabetical order and buy the first good-looking stock they see. I don't subscribe to that theory, but, by using the second letter, this study doesn't allow for that kind of interpretation.

The S&P 500 has been up, on average, 6.7% over the past three years. However, investing in stocks whose second letter of the ticker symbol was "T" -- for example, Mettler-Toledo International Inc. (NYSE:MTD) -- would have averaged a 10.5% return, with 75% of the returns positive. Investing in stocks that had a "B" as the second letter, like Bed Bath & Beyond Inc. (NASDAQ:BBBY), would not have done as well -- averaging a return of 4.3%, while fewer than 60% of the returns were positive.  

stock symbol trading return

After those examples above, I think the point is made. Just by pure random chance, we can find patterns and correlations of certain data along with stock returns. 

Beware of Randomness in Every Stock Market Study

The studies above indicating the market outperforms when the NFC team wins the Super Bowl, or that a stock with a "T" as the second letter in its symbol outperforms, are very clear examples of randomness leading to erroneous conclusions. They are reminders, though, that randomness is present in any stock market study you do.

For example, below is a table from my article just last week. It shows data supporting the January Barometer. That's the theory that says January sets the tone for the rest of the year. As you can see from the table, the data suggests that if January is positive, like this year, then you can expect outperformance for the rest of the year. While that theory sounds logical -- that January can create momentum for the market in one direction or the other -- the data below is by no means confirmation that the tendency exists. Just like the illogical studies above, the outcome might be completely random. 

sp500 returns

If pure chance can lead to the Super Bowl indicator, then there's nothing preventing pure chance from leading to the January Barometer or any other seemingly legitimate data. I'm not saying to dismiss every analysis done on the stock market. If so, I would basically be telling you to stop reading my articles. I'm just saying to be aware when looking at any data, and especially before acting on any study, that randomness exists, and might be leading you to an incorrect conclusion.  

And by the way, if you're still not convinced to ignore the Super Bowl indicator, look at the data below. I break down the Super Bowl indicator by the first 25 Super Bowls and the 25 most recent Super Bowls. Even by the numbers, it doesn't work anymore.

dow returns after super bowl

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