CPM Investing LLC - Research Publications
The figure below is a demonstration of the strength of the algorithms in avoiding losses. We do not currently offer model portfolios that contain short positions. When we expect losses in the DJIA, our actual portfolios emphasize bonds or cash to avoid the losses in the DJIA, as described below.
Our loss-avoiding algorithms have produced strong results, as evidenced by the performance of the green line in the figure above. This line is a simulation of the performance produced by trading long and short positions in the Dow Jones Industrial Average index based on our algorithms. The performance of the DJIA (buy-and-hold) is indicated by the brown line. The figure shows from 1918 through early 2023.
Our main algorithms were completed in 2008 and have consistently produced strong returns since that time. The vertical line in the chart represents the latest date of the data use to calibrate the algorithms (the in-sample period). Performance after that date indicates how the algorithms performed without any intervention or adjustment. There is an average of 11 trades per year over the period shown, with trades clustered near major market inflection points.
This article describes biases that subscribers should be aware of: Link.
Please see the article "Understanding Market Resilience" for a more detailed discussion of the Market Resilience Index® series.
The target weights for the Focused 15 Investing model portfolios are based on our proprietary measures of market resilience. Our Market Resilience Index® series for each asset class index (e.g., the Dow Jones Industrial Average) measures both short and long cycles of resilience. The short resilience cycles are measured by the Micro MRI, and the long cycles are measured by the Macro MRI.
"Buy low and sell high on the MRI"
The model portfolios consist of ETFs (exchange traded funds). The ETFs we use invest in the stocks of well-known companies and in US government bonds.
The DJIA loss-avoiding signals are used in all Focused 15 Investing model portfolios. We typically use levered DJIA-linked ETFs to increase return, while keeping overall portfolio variability low by including the more conservative Onyx sleeve.
The Onyx sleeve rotates among four low volatility ETFs. The purpose of this sleeve is to provide stable returns. It uses both loss avoiding signals and relative leadership signals to rotate assets among the four ETFs.
The Focused 15 Investing® model portfolios are designed to deliver the following benefits:
We do not make predictions about the economy, political changes, or future events. Instead, we focus on near-term projections of market resilience. When the stock market is deemed to be vulnerable, funds are moved to bonds or cash, and when the market is projected to be resilient, funds are invested in stocks. This approach is based on assessments of the market's ability to withstand negative news and events, rather than forecasting these events. We estimate investor reaction to the news, not the news itself.
To determine the relationship between prices and resilience, we analyze the full history of major markets such as the US equity market, as measured by the 100-year history of the Dow Jones Industrial Average. Our research shows that major stock market declines are often preceded by declines in resilience, and the relationship between prices and resilience is remarkably consistent over time.
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