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Stock Market Sympathy Play
The puppy dog face. We have all used it – or tried to – at some point in our lives. It is the pathos of all arguments, bringing even the most stubborn foe to a point of reluctant compromise.
The stock market sympathy play is the puppy dog face of trading strategies. It happens when stock prices react according to the residual energy of stocks in their own category, creating a window for you to make an optimal trade on a stock with a related end result. See, you’ve likely already passed the prime window to trade any of the first movers in the industry-wide trend. But the traditional followers are still open for business.
And so are related players from neighboring sectors. Suppose you see a strong development in Google. This relates to the trajectory of major global search sites, notably Bing!. Yahoo could also be thrown into the batch as you map out relationships between the biggest players in the search engine market. Eventually you get to the Chinese site Baidu, which offers similar services in Asian markets. Depending on other market dynamics, an investment in Baidu may be astute at this point, considering companies tend to copy each other once a clearly profitable improvement in functionality has been discovered.
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Think about the invention of tabbed browsing by Mozilla Firefox. Internet Explorer, Google Chrome, and other browsers quickly caught on to that idea once its practicality and popularity became clear. Sympathy plays work off of the same idea; investors pour their money into ancillary or comparative businesses to profit off of new ideas that have already earned their salt.
New government policies can affect these plays as well. Obamacare’s passage and implementation over the past eight years has shaped the growth of insurance and pharmaceutical companies in the current decade.
In the opposite direction, a company that you have invested in may, all of a sudden, lose multiple points on the stock market if a related firm suffers a severe loss. Triggers for such a meltdown include a public relations fiasco regarding the company’s top product – think Samsung’s Note 7 exploding phones scare or a major lawsuit condemning the firm for its treatment of its workers, foreign or domestic. The burden of association is as real of a phenomenon as is the boon of association during positive news cycles.
Sympathy plays are popular enough to have dedicated websites for their facilitation. Any time a freak market movement has you confused, just log on to Impactopia.com. There you can enter the company’s ticker symbol and let the website aggregate a list of related companies that tend to move in similar patterns. The trends are measured in correlative percentages, which can also be translated into relationship trees if that is more your style.
For old-school traders, Yahoo! Finance’s sectoral breakdown of the stock market can also dissect the impact of a wayward firm. Finviz.com’s user interface is far more sophisticated though, making for a more meticulous reading of market shifts.
An excellent example of a political shake-up creating loads of sympathetic movement occurred when Donald Trump won the U.S. presidential elections. Money quickly changed hands between sectors, creating a short-lived market crash. But shippers came out of that shake-up revived. The transporter DryShips Inc. saw its stock price rise by more than 195%, settling at $13.60 from a previous average of $5.
Other dry bulk cargo shippers saw similar gains. Investors began to bandwagon onto the sector, sending share prices from Eagle Bulk Shipping Inc. up 42% as well.
Big initial public offerings in dynamic sectors can also produce lucrative sympathy plays. The hype of a new company joining Wall Street usually shines a light on its closest competitors as investors choose between the old and the new in the industry.
In 2012, when Facebook had its $100 billion IPO, the list of sympathy plays included social media companies (Groupon, LinkedIn, and Pandora), foreign social media sites (Quepasa, Renren, and Youku), the IPO’s underwriters (Morgan Stanley and Goldman Sachs) and companies that owned pre-IPO equity (Microsoft, T. Rowe Price and others).
The Snap IPO earlier this year had similar effects on Facebook, Twitter, and counterparts. Transactions directly relating to SNAP shares still dominated the market. CNBC reports that deals related to the highly awaited IPO represented 10 percent of trading volume on the NYSE.
SNAP shares have performed poorly since they went public, though. Now, as Pinterest, Airbnb and Dropbox prepare their own IPOs, they face increased investor scrutiny – which explains the spirit of sympathy plays in a nutshell.
The stock market is intricately interconnected, which means that even if you are not a first mover on the day’s biggest riser, you can still make handsome profits from related plays. Keep this trick in your back pocket for when you just miss a prime trade. Track the puppy dog faces stocks make to each other.