Butter, Balls, & Other Market Indicators

Scoff if you must at the Super Bowl Indicator, which we covered this week. But understand this: It is hardly the strangest metric used to unravel the riddle of the stock market.

Maybe it's simply a reflection of the type of people drawn to Wall Street. It's not farfetched to suggest that many of them are bright, ego-driven types who may even think they are divinely inspired to explain the inexplicable. And they've come up with some unusual ways to predict market movement. How about these?

• Butter production in Bangladesh (the change in butter production multiplied by two will give you the exact percentage by which the S&P 500 will change in the year ahead);

• Presidential approval ratings (when the majority of people dislike the man in the White House, the stock market is supposed to soar);

• The Sports Illustrated swimsuit issue (when an American model graces the cover, the stock market is poised for a double-digit rise);

• Triple Crown winners (when a horse takes the thoroughbred Triple Crown, the Dow takes a tumble); or

• Women's hemlines (according to the skirt length theory, when skirts get shorter, it's time to buy, and when skirts get longer, it's time to sell)?

Or you could just stick with football. Along with hoping for a win by a pre-merger NFL team, as outlined by the Super Bowl Indicator, you could narrow your focus to total points scored or the teams in the game.

Super Bowl wins by the Green Bay Packers, Pittsburgh Steelers, and San Francisco 49ers have generally correlated with incredible rates of return. The Steelers have produced the best return over their six victories -- 25.7% growth, versus 23.9% for the 49ers (five wins) and 17.6% for the Packers (four wins). Suffice it to say that you should concentrate on the teams' combined 15 Super Bowl titles as evidence that this theory is somewhat reliable -- and ignore the fact that last year, when the Steelers and Packers went head to head, the S&P 500 advanced just 2.1%.

And just recently, S&P Capital IQ found an interesting correlation between total points scored and stock market growth. More scoring on the field (generally) translates into more money in the bank. Games with at least 50 points scored have produced an average growth of 24%. Those with 39 or fewer points scored produced an average gain of just 5.3%.

This time, the conflicting signals of a win by a pre-merger NFL team and a low-scoring game indicate that investors can expect a positive year, though with meager gains.

But don't bet your portfolio. Jeffrey Hirsch, the son of one of the men credited with inventing the Super Bowl Indicator, told us yesterday that there's only a coincidental relationship between football games and market movement. "I'm a big Giants fan, but I can't say the Super Bowl correlates with the stock market."

Yale (left) and Jeffrey Hirsch

Hirsch is the editor-in-chief of the annual Stock Trader's Almanac. His father, the market statistician and historian Yale Hirsch, founded the almanac in 1967 and devised one of its most enduring market indicators, the January Barometer.

That indicator -- the subject of our current IU Quick Poll -- is a more serious sibling of the Super Bowl Indicator. It uses the direction of the market in January to foretell the direction for the whole year. Since 1950, the indicator has worked 90% of the time. In fact, stocks have finished lower for the year only three times after posting gains in January, Jeffrey Hirsch said.

Unlike other indicators, which rely on data mining, the January Barometer has a basis in reality. Jeffrey Hirsch said it exists for only one reason: the Twentieth "Lame Duck" Amendment, which was adopted in 1933. "Since then, January's direction has correctly forecasted the major trend for the market in most of the subsequent years."

Before the amendment, newly elected senators and representatives did not take office until 13 months after their election (except when new presidents were inaugurated). Defeated "lame duck" legislators stayed in Congress for all of the following session. But since the amendment, Congress has convened in the first week of January with members elected the previous November. In addition, Inauguration Day moved up from March 4 to January 20.

All this means January is host to many important events, indicators, and recurring market patterns, Jeffrey Hirsch said. "US Presidents are inaugurated and present State of the Union addresses, new Congresses convene, financial analysts release annual forecasts."

So he finds it "somewhat amusing" that he and his father are forced to defend the January Barometer every year. In a recent blog post, he wrote:

Every February our January Barometer gets raked over the coals and every attempt at disparaging this faithful indicator comes up lame. It never ceases to amaze us how our intelligent and insightful colleagues... completely and utterly miss the point and fallaciously argue the shortcomings of the January Barometer.

Both Hirsches remain firmly committed to the January Barometer. As for the Super Bowl Indicator, that's a different story. "I just asked my father about that," Jeffrey Hirsch said. "It's entertaining, but it's not related to events that actually impact the markets like the January Barometer."

Who invented the Super Bowl Indicator is open to speculation. Credit goes to both Yale Hirsch, who remembers working on it as early as 1972, and Robert Stovall, who said he adapted it in 1979 from a correlation introduced a year earlier by a New York Times sportswriter.

"Maybe they both came up with it," Jeffrey Hirsch said.

Stovall, a market strategist for Prudential Securities, seems to take it a little more seriously. He calls himself the guardian of the Super Bowl Predictor. "People who didn't invent it are quick to criticize it," he told ABC News last week. "January is a cold month and if I can get some warmth out of the Super Bowl Predictor, I'll take it, especially when it's been quite accurate."