Jason Leavitt is the founder and head of research at LeavittBrothers.com - a boutique research firm which offers market analysis and trading ideas to hedge funds, financial advisors and full- and part-time independent traders.

Jason Leavitt.

The Secret to Outperforming the Market

Sector Rotation – The Secret to Outperforming the Market

Over time, 80-85% of stocks under-perform the market. Let that sink in for a minute – 80-85% of stocks under-perform.

At first glance this doesn’t seem to make sense. You’d think some stocks would do well and others would do poorly, and the market would be the average right in the middle. But this isn’t the case because for every Netflix – and Netflix rallied 1800% from its 2011 bottom to its 2015 top – there are 20 or 30 stocks that under-perform. For every Tesla, for every Google, for every Amazon, for every Facebook, for every Priceline, there are 10 or 20 or 30 stocks that under-perform. And for every stock that does well but doesn’t knock the ball out of the ball park, there are still 2 or 3 or 4 stocks that under-perform.

Let’s say this is the distribution of gains and losses of each stock in the S&P 500. The average is about 12%.

But as you can see, most stocks under-perform while a much smaller percentage out-performs…and an even smaller percentage out-performs by a wide margin.

This is typical. Over time, whatever the market does, most stocks will do worse…only 15-20% will do better and less than 10% will truly do great. This means the only way to beat the market is to be in some of the stocks that out-perform by a wide margin. That’s the only way. And you wonder why so many funds underperform. By definition, it would be impossible to beat the market with a well-diversified portfolio because by default, many of the stocks in the fund would be invested in stocks that don’t do well.

Why Rotation Matters

Money rotates around the market. Groups run hot and cold. At any given time, there will be a handful of groups doing extremely well and almost everything else will be just on par with the market or doing worse.

And groups that are hot, stay hot for a while. We’re not talking about day-to-day strength. We’re not talking about news causing a group to perk up in the near term. We’re talking

about an underlying theme that persists for several months and often upwards of a year.

The only way to out-perform the market is to be in the best stocks in the best groups at any given time. This is how it may play out over the course of a year.

What’s Beneath the Surface

Let’s say the S&P rallies 12% – a pretty normal year. But beneath the surface, oil stocks may run up 50% over the course of 6 months.  And while this is taking place, semiconductors may rally 30% in 2 months. And then money may rotate out of semis and into trucking, which may run 20% in 6 weeks. And as money rotates out of trucking, it may move into financials, which then rallies 25% in 2 months.

And the next group…and the next group.

Beneath the surface, this takes place on an on-going basis on multiple time frames. There are mini bull markets taking place that last anywhere from a couple weeks to several months.

A Way to Make Trading and Investing Easier

Trading and investing isn’t easy, but it’s made easier if you identify where the bull markets are and then drill down and find the stocks that are poised for big gains.

Remember this graphic from above? Stocks don’t sit in one place for long. They come into favor and fall out of favor. Stocks that have been dead money will come to life and lead the market for 6 months, and stocks that have been leading will take a break and trade on par with the overall market.


You want to be focused on stocks that are on the far right side of the histogram shown above. Otherwise all your gains and losses will just cancel each other out.

About the author…

Jason Leavitt is founder and director of research at Leavitt Brothers, LLC, a boutique research firm which offers market analysis and trading and investment ideas to investment advisors, hedge funds and full- and part-time independent traders. He has a BS in civil engineering from the Univ. of Illinois and an MS in engineering (robotics) from the Univ. of Texas.

This document expresses the views of the author as of the date indicated; such views are subject to change without notice. It is for informational purposes and should not be used for any other purpose. The information does not constitute a suggestion to buy or sell anything. Information and data used could have come from third party sources, sources believed to be reliable, but this may not always be the case. No attempt has been made to verify the information or data. Past performance is not an indication of future results.

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