CPM Investing LLC - Research Publications
Concepts behind the “technology adoption cycle” (TAC) have proven useful in assessing the near-term resilience of stock and bond markets. The TAC was popularized by Geoffrey Moore, author of Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers (1991). It describes the sequential pattern of new idea adoption across different segments of a population of decision-makers.
The new idea can relate to a technology, practice, or even a new, non-consensus outlook for the capital markets that is ultimately widely accepted as valid in the real world. As described by Moore, the sequence of adoption proceeds through segments of the total population of potential adopters. and these are shown in the diagram below. Each segment has its own criteria for deciding to adopt the new idea, and the criteria often relate to the prior segment’s actions.
For simplicity, we combine the Innovators and Early Adopters into one group called Pioneers. Thus, we use these groups: 1) Pioneers, 2) Early Majority, 3) Late Majority, and 4) Laggards.
TAC concepts about how different segments of a population make decisions have informed the research and development of CPM Investing’s Market Resilience Index™ (MRI) series. The MRI are important tools that allow us to see how new, non-consensus market outlooks originate and how they are adopted by successively larger investor segments until those outlooks ultimately represent the market’s consensus outlook. The MRI enables CPM Investing to create model investment portfolios of ETFs that achieve high risk-adjusted returns.
For each targeted market index (e.g., the Dow Jones Industrial Average, US 10-year Treasury bond index), we create a series of indexes that track pricing trends.
The main resilience indexes are (a) the Micro MRI tracking the short-term price trend and (b) the Macro MRI tracking the long-term price trend. Conceptually, when these trends are positive, they indicate optimism of that segment of investors. When they are negative, they indicate pessimism.
We believe that the Micro and Macro MRI correspond to the segments of decision-makers described by Moore. The Micro MRI tracks the sentiment of the Pioneers of a new non-consensus investment outlook, while the Macro MRI tracks the sentiment of the Early Majority as it begins to adopt the new non-consensus outlook.
The Pioneers and Early Majority are the most important segments of the population of investors to us. By the time the Late Majority segment adopts the new outlook it is, by definition, no longer a non-consensus outlook, and portfolios positioned to take advantage of the outlook will no longer experience significant price gains.
We seek to position our portfolios between these two groups. We follow what the Pioneers are doing, and we anticipate what the Early Majority will do.
By positioning portfolios between these two segments of investors and using the MRI assessments of resilience for a range of stock and bond markets, we can create portfolios with high-risk-adjusted returns. Investing based on the patterns of human behavior tracked by the MRI is sufficiently strong that it reduces the need to focus on the outcome of current events. Instead, we focus on anticipating the market’s reaction to the current events.
Using the MRI, and other MRI-related variables, CPM can determine the expected resilience of a market over a three- to 15-week timeframe. We currently create MRI series for dozens of stock, bond, commodity, and currency markets around the world. However, our focus is on major stock markets (e.g., DJIA, NASDAQ) because of their liquidity and the high returns available.