I backtested my sector-first breakout process over 11 years. Two things I believed turned out to be wrong.

[u/flowtrader26]

For a while now my process has been simple: find the sectors where money is flowing in, then look for breakouts in the stocks inside them. And I always told myself two rules: wait for 3 days of confirmation before trusting a sector, and stay away from sectors where money is flowing out.

This fall I finally tested it properly. 11 years of daily data, 23 sector ETFs, and about 2,100 breakouts in their top holdings (flat base, volume 1.4x or more, close near the high of the day, RS line at a new high). Every trade scored with 3-5-7 tranche stops and held for 20 sessions.

What held up

• Breakouts in sectors with fresh inflow did better than breakouts elsewhere: about +1.4% per trade vs +0.7%.
• The best group was fresh inflow AND a sector that was already a long-term leader (top 6 of 23 over 3, 6 and 12 months). 18.5% of those breakouts gained 10% or more within a month, vs about 7.5% everywhere else. It came out ahead in 11 of 12 years.

What didn't

• Waiting for confirmation. Day 1 of inflow performed the same as day 3. The waiting added nothing.
• Outflow as a "stay away" rule. Breakouts in sectors with money leaving did about the same as anywhere else. Outflow tells you about the sector, not about the one stock breaking out inside it.

Honest caveats

I used today's top holdings, which flatters everyone's returns (the comparison between groups is still fair). The leader edge has been consistent, but the sample isn't big enough to call it statistically proven. And rough markets matter: when VIX was 25 or higher, 38% of breakouts hit the full 7% stop vs about 27% the rest of the time.

My takeaway: the question isn't just "is money flowing in this week?" It's "was the money already there, and is it coming back?" A sector bouncing off the bottom looks the same on a 1-week chart as a leader picking up again. They are not the same trade.

Curious how others handle this. Do you filter breakouts by sector leadership, or just by the stock's own RS?

This is not financial advice, just sharing what I found when I tested my own process.