In our search for the right assets to invest in, we can often gain on the presented news and information. However, by the time 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.
The Sympathy Play
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 maintaining a hot sector list. This list is one of the best ways to ensure that you are in a position to pounce when the best opportunities come along.
A sympathy play typically happens as a result of another stock’s earnings and/or news. It can cause another stock or sector to move despite not having any news. It’s moving in sympathy.
All About 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’re likely going to 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.
To help in this process of finding the right plays to make it is worthwhile to not just think of stocks that might be related but to have a list of correlated stocks. One can be found here showing how closely correlated they are. Unicornbay went through 21million assets and put together the list of the top 1000 most correlated and least correlated stocks. They also allow you to select what 1000 assets you wish to view, be it a specific market, stocks only, or other assets.
We are looking for a 50% correlation or better. If we are at 0%, there is no correlation, they do whatever they want. A negative % means then when one goes up, the other goes down.
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.
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 that have strong sympathy moves. Retail is always good. As well as airlines, biotech, and cybersecurity. You can also find that the price of gold and oil will influence related stocks.
Where Can I Find Sympathy Plays on Finviz?
Using the information from Finviz it takes only two clicks to find a sympathy play. 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 and but with good bid support, this combination lowers the position’s risk. There’s nothing fancy about this play, but it works.
A sympathy play uses human psychology and timing to gain. If we have a list of companies that we can use to gain from the benefits of others, we can be successful 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. As always, never bet with one trade more than you can afford to lose. Good luck with all of your trades.