March Madness Indicator: Why the Stock Market Should Root for Kentucky

While your March Madness bracket may be busted (ahem, Duke), stock traders can still profit from the Sweet 16, if past is prologue. With the help of Schaeffer's Senior Quantitative Analyst Rocky White, we've outlined how the S&P 500 Index (SPX) tends to perform the rest of the year after certain college basketball teams and conferences take home the NCAA Tournament trophy.

Why Stock Traders Should Target a Wildcats Win

Below are S&P returns from April through December, depending on the winning NCAA conference. Only conferences that have won the tournament at least twice are shown.

The SEC has won the NCAA tournament 11 times, last taking home the prize in 2012. After each of those wins, the SPX has been higher from April through December, averaging a gain of 9.56%. There are three SEC teams in the 2017 Sweet 16, which kicks off tonight: Kentucky, Florida, and South Carolina. 

Below are SPX returns from April through December, depending on the winning NCAA team. Only teams with at least two wins are shown. The Kentucky Wildcats have won the championship eight times -- two-thirds of the SEC's total wins -- and the SPX has averaged a healthy gain of 11.15% after a UK win. Florida has won twice -- last in 2007 -- but the SPX generated a relatively meager average return of 6.44%.

Other Sweet 16 Teams to Watch

But what if you absolutely can't root for Kentucky? (I come from a long line of die-hard Louisville and Cincinnati fans, so personally I'm forbidden.) In that case, you may want to put North Carolina, UCLA, or Gonzaga on your list.

The ACC is tied for the most wins of any conference, with 16, the last coming in 2015. The SPX was higher through the end of the year 75% of the time, averaging a nice return of 9.59%. UNC is the only ACC team still standing, with five previous NCAA championships, the last in 2009. The SPX boasts an average year-end return of 13.01% after a North Carolina win -- the best of all Sweet 16 teams -- but has been higher just 80% of the time.

The Pac 12 also has 16 previous NCAA wins, but hasn't taken home the trophy since 1997. Still, the SPX ended the year positive 88% of the time after a Pac 12 win -- second to only the SEC -- averaging a gain of 8.91%. Among the Pac 12 teams still in the dance are UCLA, Arizona, and Oregon. UCLA boasts the most NCAA Tournament wins of any team, at 11, but hasn't won since 1995. The SPX has rallied from April through December 82% of the time after a Bruins win, but averages a relatively modest gain of 5.5%.

The West Coast Conference has won the tournament just twice, the last time more than 60 years ago, in 1956. The SPX was higher year-end just one of those times, but averaged the best gain of all, at 10.3%. Gonzaga is the lone team representing the West Coast Conference in the Sweet 16.

The Big East took home the title last year, and prior to that won the tournament three other times. The SPX ended the year higher three of those four years, averaging a gain of 6.83%. Butler and Xavier are the Big East members still in the tournament, but neither team has won a championship.

Short Kansas, Big Ten?

As far as teams to root against, the SPX has averaged a loss of 5.12% from April through December following a Kansas win, with the Jayhawks winning three times, the last in 2008. Further, Kansas -- as well as Baylor and West Virginia -- is in the Big 12 Conference, which has won five times. The SPX was in the black through year-end just 60% of the time after Big 12 wins, averaging a loss of 0.6%.

Likewise, Michigan, Purdue, and Wisconsin are members of the Big Ten, which has won the tournament 11 times, the last in 2002. SPX returns after a Big Ten win are the most abysmal, with the index moving higher from April through December a paltry 36% of the time. Further, the SPX averages a year-end loss of 4.76%.

Word to the Wise

In closing, it's ridiculous to think a basketball game can truly affect the stock market, so it's unwise to adjust your trading strategy based on these random stats. As with the Super Bowl Indicator, the results are simply due to randomness -- like many stock market indicators -- and should be taken with a grain of salt. Instead, stock and options traders should base their positions on our Expectational Analysis methodology, which takes into account fundamental, technical, and sentiment indicators.

Don't miss Schaeffer's free weekly stock market forecast. Sign up now for Monday Morning Outlook.