After such a great start to the year for equity markets (S&P up 4.4% in January), the statisticians are out in full force! When January is up, the market is up 79% of the time for the entire year (versus up 64% on the time on average).
With this good news, we can now add to our long conviction if the NFC champion Giants can win the Super Bowl – like the January effect, if the NFC wins, the S&P is up 79% of the time (by an average of +11%). The only headwind here is that Pats are favoured by 3. The fact that we have only had 41 Super Bowls (i.e. observations) renders this stat less meaningful in my opinion but let’s forget that for now. I had the misfortune of attending the Giants/Pats Super Bowl in 2008 hoping I could say “I was there for the undefeated season!” Looking back, January 2008 was -6.2%, the Giants won and the market ended down 38%!!
While the Super Bowl stat is fun, for a hedgie there is no real meaningful value. So my interest was peaked by a recent Bloomberg article (click here to read) featuring a quant shop, Analytic Investors LLC. Now only a quant could come up with this theory but here goes. They believe that many bettors tend to “overestimate” the chances of the team which rewarded them the most during the regular season – i.e. they bet on the team with the higher alpha to win the Super Bowl! Alpha is determined by the number of wins (or surprises) versus the spread on regular season games. The Giants had big alpha this year of 32.3% given four of their wins were big upsets. The 49’ers were highest at 52.5% and the Pats were a lowly 16.1% - just a lot of beta!
Unfortunately, teams that outperformed in the regular season tend to underperform in the playoffs. In the last 3 Super Bowls, the team with the lower regular season alpha was favoured and covered the spread. In Vegas, money has been voting in favour of the hot Giants. I am sticking with the hedgies and the “Moneyball” types – no emotions. Take the Patriots – they will more than cover the spread (I hope!).
Have a great Superbowl weekend.