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587 rotary valve having problems. Runs great on the trailer but not in the water. Help

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Have you checked compression ? What makes you think it’s the rotary valve ? Low compression or lack of fuel are the usual suspects if it won’t run in the water. Of course make sure your rotary timing is right. Rotary problems are usually accompanied by carb spray and backfiring.
 
I see you have the valve lined up with the mark on the case. Are you using that mark to time or are you using a degree wheel? But as said previously, what makes you think its the rotary valve?
 
As Jeff said that timing mark isn't correct. You can print the paper degree wheel from the manual and cut it out to use. You then need a dial indicator to find TDC on the front piston and follow the manual from there.
 
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