Skin in the Game

 | Feb 02, 2014 | 8:00 AM EST
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Wall Street and the Super Bowl have never been closer.

The opening kickoff will take place just across the river from where the opening bell is rung -- although it might take longer to get to Manhattan from New Jersey's MetLife Stadium after the big game than it takes to drive to Philly. But as any viewer of business TV knows, the strongest link between the trading floor and the gridiron is the Super Bowl Indicator.

The popular definition of the Super Bowl Indicator is that one can predict the direction of the stock market based on the winning team's conference: If the NFC's Seattle Seahawks win, the market should rise; but if the AFC's Denver Broncos win, stocks should fall.

Market pros look down their noses at those who discuss the Super Bowl Indicator, noting (rightly) that there's a difference between correlation and causality, as this excellent blog points out (it also has a great table on market returns and Super Bowl winners). But I think the pros secretly love it just as much as everybody else does. It has three elements Wall Street denizens really enjoy: sports, numbers and endless debate.

In fact, there's no official definition of what the Super Bowl Indicator is. The original definition (and the one really needed to give it such a high correlation of about 75%) was that the market would rise if a team from the pre-merger NFL wins and fall if a team from the AFL is victorious. The market has gone up each time the Pittsburgh Steelers won -- and the Steelers were an original NFL team that later moved to the AFC.

It gets even more complex with the Baltimore Ravens, formerly the Cleveland Browns, who came into the NFL from the All-America Football Conference -- but the only person probably qualified for a ruling on that is Eddie's dad in Barry Levinson's Diner.

For me, the big question is where that leaves the expansion Seahawks, the only team that's played in both the AFC and NFC. I'd say that if they win, the market stays flat. So, if you're basing your portfolio on who gets the Vince Lombardi Trophy, you could pretty much cross off going long.

If your time horizon is a lot shorter, you may want to bet on the market falling Monday, as it tends to do the day after the Super Bowl. On average, the S&P 500 dips 0.06%. Trading volume also tends to lag, adding to volatility, as many traders call in sick and many more show up a little worse for wear. With the Super Bowl in New York this year, expect that effect to be compounded. On Monday morning, you may find more traders asleep below decks in the Bud Light Hotel than on the NYSE floor.

This could be the catalyst for a more concerted effort to make the Monday after the Super Bowl a market holiday. Until then, a good strategy might be to go to sleep at kickoff and start Monday's market action refreshed and ready to outmaneuver the hangover crowd.

Of course, there's a big difference between investing, trading and gambling -- but that doesn't mean market players won't be paying attention to the Super Bowl line. Vegas odds have pretty much settled on the Broncos by 2 1/2 points. Most analysts who purport to be in the know favor the Seahawks, not in the least because good defense tends to trump good offense in the Super Bowl.

So why is Denver the favorite? Because casual bettors are pulling for Denver quarterback Peyton Manning's fairy-tale ending to a historic comeback season. This is a case of the public pushing the line away from where the sharp gambling money would have it, or as Wall Street likes to say, the retail investors vs. the sharp money. But let's remember that the smart money has been burned plenty betting against stocks that the average investor loves.

For me, the bet is on how many times Peyton Manning shouts "Omaha" (the over/under is 28 1/2). If it's over, you might want to buy Berkshire Hathaway (BRK.A, BRK.B), as everyone will subconsciously be thinking of Warren Buffett.

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