How Earnings Season Provides A Great Opportunity For Sympathy Trading

One of the best parts of earnings season is that it’s a great time for relationship-based trading. The volatility brought on by one company’s quarterly report can often cause related companies to trade in tandem.

For example, if Macy’s reports a weak holiday sales season, shares of a peer like Kohl’s will likely trade lower on the news. It’s not that Kohl’s investors have literal sympathy for Macy’s, it’s that they’re extrapolating information they get from Macy’s and applying it to Kohl’s stock. If Macy’s had a bad holiday shopping season, the logic goes that Kohl’s likely had one too.

This isn’t true 100% of the time, but the pattern is common enough to make it worth paying attention to.

Recent Examples

There have been plenty of sympathy trades this earnings season alone. PepsiCo traded higher on its earnings beat on July 10, which is why Coca-Cola traded higher on the day. Shares of Domino’s Pizza trade down after it’s earnings report on July 19, which caused Papa John’s to trade lower.

Sometimes, several companies in the same industry will report earnings very close to each other or on the same day. Bank of America reported a stellar quarter on July 16, and Wells Fargo, Citigroup and JPMorgan—which had all reported on July 13—all opened the day much higher.

But there’s more to sympathy trading than identifying similar companies. Sometimes, what’s bad for one company is good for another. For example, if Verizon reports that it has lost U.S. wireless subscribers in the second quarter, that could be good news for T-Mobile or AT&T. Now, this isn’t a guarantee, so it’s important to wait and see what a company actually says in its report.

Here are a couple of potential sympathy trading ideas for companies that report earnings in the coming days:

-Electronic Arts reports earnings next week, which could move peer stocks Activision Blizzard and Take-Two Interactive.

-General Motors reports Wednesday morning ahead of Ford on Wednesday afternoon.

-American Airlines and Southwest Airlines report earnings on Thursday, which could impact Spirit Airlines and JetBlue.

Disclosure: the author holds no position in the stocks mentioned.

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