What is a sympathy play in the stock market? Sympathy is a human emotion, and because humans love to trade stocks, how does sympathy play out in our markets? In searching for the right assets to invest in, we often gain an advantage on breaking news and information. However, when we hear the new announcement, it is usually too late to take advantage of the most significant portion of the price swing, as everyone else is hearing news simultaneously, and some with knowledge beforehand.
When you read the information about an earnings call, then, at best, you obtain it after those that were on the earnings call. With sympathy plays, you are executing your trade with a related stock or another asset with the intention that that stock will also move, albeit just after the related stock does. We will go into the mechanics behind a sympathy play and easily find the best plays to make.
Table of Contents
Sympathy Play Introduction
As stock market trends unfold, exciting things can happen. Day traders don’t have a long-term, Warren Buffet-style mentality. Our trading isn’t meant to make money in 40+ years. We’re looking to earn profits from very short-term trends. For this reason, it is critical to maintain a hot sector list. This list is one of the best ways to ensure that you can pounce when the best opportunities come along.
A sympathy play typically happens due to another stock’s earnings and news. It can cause another stock or sector to move without news. It’s moving in sympathy.
Relationships and Timing
The price movement of a sympathy play is a reaction based on the residual energy of stocks in the same category (or strongly correlated stock). Any time you’ve passed the prime window of trade for first movers in an industry-wide trend, you still have a chance to gain from the followers of that same related business or sector. Here’s an example.
Ford announces better-than-expected earnings. You buy GM/Tesla/ Daimler because they will likely have a similar result. What may be an even better choice is if you purchase Superior Industries International SP, an aluminum wheel maker for autos and lite trucks.
With a longer play, suppose you see some solid technological development in Google. This movement will relate to the trajectory of global search sites, notably number two, Microsoft’s Bing! Next comes Yahoo as we develop our relationships in the search engine market, and finally, we end up with Baidu, the Chinese engine focusing on Asia. If we confirm with other factors, Baidu might be an excellent sympathy play for us, as companies in the same sector will copy each other once a profitable functionality is recognized.
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To help in this process of finding the right plays, it is worthwhile to not just think of stocks that might be related but to have a list of correlated stocks. Unicornbay went through 21 million assets and compiled the list of the top 1000 most correlated and least correlated stocks. They also allow you to select 1000 assets you wish to view, be it a specific market, stocks only, or other assets.
There is another useful tool to check two stocks or an even better one here to look at many different stocks, helping you confirm your ideas of related stocks.
We are looking for a 50% correlation or better. There is no correlation if we are at 0%; they do whatever they want. A negative % means the other goes down when one goes up.
Now, it should be noted that you don’t just pick two stocks that have a high correlation between them. There should be another tie to them in some way. A few years ago, Bank of America and Japan-based Advantest Corp., which manufactures semiconductors, had a 99% correlation for three years.
But this is what has happened in the past three years.
Unicornbays comparison tool
Targeted News
Recognizing a potential sympathy play trading opportunity means identifying when news moves a market with broader implications or only impacts a specific company. It’s also vital to know industries and sectors with strong sympathy moves. Retail, airlines, biotech, and cybersecurity are always good. You can also find that the price of gold and oil will influence related stocks.
Sympathy Plays on Finviz
Using the information from Finviz, it takes only two clicks to find a sympathy play. Let’s say we see a jump in China’s financial sector. We’ll then look for an ascending list of market cap lagging financial sector sympathy stocks. Then, we find one that fits the bill. Order stocks by the market cap, and from there, check their float. Look for lower floats, but with good bid support, this combination lowers the position’s risk. There’s nothing fancy about this play, but it works.
Final Thoughts
A sympathy play uses human psychology and timing to gain. If we have a list of companies we can use to gain from the benefits of others, we can succeed with this technique. However, make sure there’s a reason behind your trades. Just because a correlation can be found between two stocks doesn’t mean that a sympathy play is guaranteed.
