Abstract
This paper applies almost stochastic dominance to examine if sector rotation over business cycles exists and investors using it as a top-down approach can outperform the market. Employing monthly returns of Fama-French 49 industry portfolios in last three US business cycles defined by the National Bureau of Economic Research (NBER) and almost stochastic dominance to derive industry efficient sets, the results show that, different industries take performance leadership in different business cycle stages, portfolios consisting of efficient industries can almost stochastically dominate the S&P 500 Index at first- and second-order, or, at least, generate equal performance, depending on the phase of business cycle, which indicates that sector rotation is obvious and sector rotation strategy is viable. This paper also utilizes almost stochastic dominance to investigate variation in performance across business cycles of 11 sectors classified by the Global Industry Classification Standard (GICS). The findings are that, under first-order almost stochastic dominance, utilities is the only sector with cyclicality of stock price, while under second-order almost stochastic dominance, sectors with cyclicality of stock price include consumer discretionary, materials, utilities, energy, information technology, and telecommunication services.