Indicator of the Week: The Super Bowl and Randomness

Foreword: Congratulations to the New England Patriots on winning the Super Bowl. Unfortunately for investors, the Super Bowl stock indicator is now forecasting underperformance. Historically, stock markets have underperformed when the AFC team wins the Super Bowl. This is shown in the table below summarizing how the Dow Jones Industrial Average (INDEXDJX:DJI) has performed for the rest of the year after the Super Bowl, depending on which conference the Super Bowl winner comes from.

Despite how lopsided the numbers in the table are, I doubt anyone is adjusting their trading strategy based on the outcome of the big game. It's ridiculous 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.

More Randomness: Here's another absurd study, which looks at stocks' returns over the past two years 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 that begin with a letter near the beginning of the alphabet may tend to outperform, since investors often see lists in alphabetical order and they buy the first good-looking stock they see. I don't subscribe to that theory, but by using the second letter it doesn't allow for that kind of interpretation.

Anyway, here are the results. Keep in mind the S&P 500 Index (SPX) averaged over a 20% return over the past two years. Stocks that had a 'J' as the second letter in their symbol averaged a 31% return, and 83% of the returns were positive. The letters 'Y' and 'A' also saw good returns as the second letter. As far as poor-performing second letters, 'Q' was the worst, though it only had 20 returns. 'G' was the second worst ... Okay, I'm not going to waste anymore time analyzing these numbers. The point is that just by pure random chance, we can find patterns and correlations of certain data along with stock returns.

Randomness is Everywhere: The studies above indicating the market outperforms when the NFC team wins the Super Bowl, or that stock symbols with the letters J, Y or A as the second letter outperform, 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 one of my articles less than two weeks ago, showing data supporting the January Barometer. That's the theory that January sets the tone for the rest of the year. As you can see from the table, the data suggests that if January is negative, like this year, then you can expect underperformance for the rest of the year. While that theory -- that January can create momentum for the market in one direction or the other -- sounds logical, the data below is by no means confirmation that the tendency exists. In fact, it's interesting how much the data below looks like the data for the Super Bowl indicator.

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 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.