Just this week, we saw the two original meme stocks, Gamestop Corp. ($GME), and AMC Entertainment Holdings Inc. ($AMC) experience volatility we haven’t seen in a while. Influential social media personality/investor, @RoaringKitty, the personality behind the original GameStop craze, posted a meme on Twitter/X on Sunday, (05/12/2024), marking his return to social media. The next morning, shares of $GME went from $17.46 per share to a high of $38.20 per share. A more than 100% increase in share price in a single day. Look closer and you’ll see the sympathy play. That same morning, with no news, and no earnings, shares of $AMC, the "sister" meme stock of $GME, soared from $2.91 per share to a high of $5.88 per share. A more than 100% increase in share price in a single day. The following day, shares of $GME hit a high of $64.82 per share, a more than 350% increase in share price from the close on Friday of the previous week, while $AMC hit a high of $11.88 that same day, marking a more than 400% increase in its share price from the close on Friday of the previous week.

How to Identify Sympathy Plays in the Stock Market

Exploiting sympathy plays in the stock market can be an effective strategy as a trader, specifically if you are primarily focused on short-term results, but just like any aspect of investing or trading there are also risks present. Let’s start with what is key for a trader to capitalize on sympathy plays in the stock market.

First, you’ll need to understand and break down the market into extremely niche sub-sectors. For example, if you wanted to pounce on a perceived sympathy play opportunity related to an EV (electric vehicle) manufacturer, you would need to group all publicly traded EV companies together. For instance, if news came out about Tesla ($TSLA), you would also want to keep an eye on Rivian ($RIVN), Lucid ($LCID), Canoo ($GOEV), etc., as the news (positive or negative) regarding Tesla, could very well have a correlating impact on one of its competitors in its sub-sector. Therefore, it’s crucial you understand who the companies are in the sub-sector you’re keeping an eye on. You’ll want to do this for multiple sub-sectors of the stock market so that you have a wide range of opportunities when they present themselves.

After you’ve broken down the market into sub-sectors and identified all competitors within that sub-section of the stock market, you’ll need to stay up to date with market news and macroeconomic trends. Sympathy plays tend to be short-term, so the window of opportunity to enter the trade in the proper zone is typically a small time frame. This means staying up to date on news in real-time is a pillar of success to effectively trade sympathy plays. You can do this by creating and abiding by a routine that works for you and allows you to constantly be exposed to news in real time.

For instance, you could read the news and scroll social media first thing when you wake up in the morning so you go into the market session feeling confident that you are knowledgeable and aware of all the major news, and sentiment related to the stock market that day, and maybe even a specific sub-sector of the stock market where you can identify a sympathy play that might present itself. Then, during the market session, you should be tuned into a squawk service or a financial news station so you can have news and major information related to the stock market given to you in real-time. This will allow you to focus on other aspects of your trading day without having to stay visually focused on a TV screen, or without having to read articles, and can potentially help you capture opportunities related to sympathy plays immediately as they unfold.

Risks of Trading Sympathy Plays

As mentioned earlier, there are risks present with attempting to profit off sympathy plays, especially depending on what side of the market you’re on (short or long). First, and most importantly, it’s worth noting that with any speculative investment, you are at risking of losing your principal investment, and if you’re on the short side of a trade, more than your principal investment. For this reason, it’s critical that you understand and abide by your investment objectives, as well as understand and abide by your risk tolerance. Consistency is key when trading the markets as well as investing, and understanding these things will help you achieve longevity in the markets.

Conclusion

In conclusion, sympathy plays have shown themselves to market participants over the history of the stock market, most recently in the AI sector, and in the “meme stock” sector. Sympathy plays in stock trading are when the share price of one company is affected by the news, earnings, or price changes of another companies stock within the same sub-sector of the market. To successfully identify sympathy plays in the stock market it’s critical that you establish and abide by a routine of staying up to date on market news and macro-economic trends, as well as have an understanding of who all the competitors are within a specific sub-sector of the stock market. Just as with any aspect of investing and/or trading, it’s also crucial that you understand the risks associated with speculative investments such as sympathy plays, especially depending upon what side of the market you’re on (short or long), as you could lose all or more than your principal investment.