With the Dow Jones Industrial Average having exceeded 14,000 for the first time since October 2007 during Friday's trading session, the timing could not have been any better for investors to turn to one of the most irrational stock-market indicators in all of trading. In the simplest terms, the indicator suggests that if the AFC wins, the market will decline for the balance of the year, whereas if the NFC wins, the market will advance. Sounds absurd -- except it has been accurate 75% of the time. This is the ultimate case of "Correlation does not prove causation."
Beware of the Ravens
Based on this indicator, the victory by the Baltimore Ravens is a bad omen for the remainder of the year. The market, according to the past accuracy of this sign, has a 75% likelihood of declining for the whole of 2013. If you see a sell-off in the next few days, however, it is not time to panic. At current levels -- particularly given some of the ongoing economic weakness in the economy -- a correction of some kind should be expected.
Last week's surge to push the Dow past 14,000 has the Ravens calling "nevermore, nevermore," but perhaps a more analytical approach is in order. The two top-performing stocks last week were Verizon (NYSE:VZ) and AT&T (NYSE:T). Each stock was up roughly 4.4%, bolstered by new law set to go into effect over the weekend.
The new law makes it illegal for individuals to unlock, or "jailbreak," their smartphones and then switch carriers. While the law is anti-competitive, anti-freedom, and, therefore, anti-American -- if you'll permit a little editorialization -- the law is great for wireless providers. It is expected to boost customer retention by ensuring that individuals will not obtain premium smartphones and then switch to lower-cost carriers that do not offer the same devices. I suppose that in a world in which the Super Bowl indicator can be given a voice, it should come as no surprise that the law will make it harder to get the best service for the lowest price.
The next-best-performing stock in the Dow was Caterpillar (NYSE:CAT), which climbed more than 4% despite disappointing earnings numbers. The company reported earnings per share of $1.46 excluding one-time items; analysts had been expecting EPS of $1.69. Revenue fell by 7% to $16.08 billion against forecasts of $16.12 billion. The catalyst for the rise, however, was the generally upbeat outlook and guidance offered at $7 to $9 per share. A variety of analysts had lowered projections to less than $8, so the wide range felt like an optimistic view heading forward.
Ready, set, fall
The Super Bowl indicator, which was accurate in 28 out of 31 years between 1967 and 1997, poses an interesting quandary for this year's winner. On the one hand, although the Ravens trace their team's origin to the Cleveland Browns, which was originally an NFL team -- those teams in the NFL prior to the NFL-AFL merger became NFC teams -- the Ravens entered the league as an AFC team. Confusing the picture even more is the fact that when the Cleveland Browns were given new life as an expansion team, they continued to exist as an AFC team. One might argue that the team should be counted as an NFC team, but as the San Francisco 49ers proudly represented the NFC, the honors this year must go to the AFC. As such, the market is heading down, if the indicator holds.
Two key pieces of economic data were released last week that one would expect be taken more negatively than they were. U.S. gross domestic product was negative, and the jobs number came in slightly lower than forecast. According to a poll of economists conducted by Reuters, the expectation had been that the economy would add 160,000 jobs in January and that the unemployment rate would hold at 7.8%. In reality, the unemployment rate ticked up to 7.9% as only 157,000 jobs were added to the labor market -- not a disastrous miss, but a miss.
Apparently overshadowing the current numbers was the fact that the last two months of 2012 were revised higher by a combined 127,000 jobs and that the averages calculated for both 2011 and 2012 looked better as well. The market's enthusiasm was sufficient to bring the Dow above the psychologically important 14,000 level. With the all-time high in sight, I foresee an imminent correction -- particularly with those pesky Ravens circling above.
In all seriousness, the Super Bowl indicator is a fun little coincidence, but not a good basis upon which to trade. To put this in perspective, if you carry pi out to enough decimals, eventually you will find your phone number; does that mean that the circle is calling you? The market has looked strong, but some cautious optimism is in order.
Fool contributor Doug Ehrman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.