CPM Investing LLC - Investment Publications
Concepts behind the “technology adoption cycle” (TAC) have proven 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) and describes the sequential pattern of adoption across different segments of a population of decision makers about a valid new idea.
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 (1991), the sequence of adoption proceeds through segments of the total population of potential adopters called 1) Innovators, 2) Early Adopters, 3) Early Majority, 4) Late Majority, and 5) Laggards. Each segment has its own criteria for deciding to adopt the new idea, and the criteria often relate to the prior segment’s actions.
TAC concepts about how different segment of a population make decisions has informed the research and development of CPM Investing’s Market Resilience Index™ (MRI) series. These MRI are important tools that allow us to see how new, non-consensus market outlooks originate and are adopted by successively larger investor segments until those outlooks ultimately represent the market’s consensus outlook. The MRI enable 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 the short-, medium-, and long-term pricing trends in the market. The most prominent indexes are (a) the Micro MRI tracking the short-term trend and (b) the Macro MRI tracking the long-term trend. Conceptually, when these trends are positive, they indicate higher market resilience. When they are negative, they indicate vulnerability.
We believe that the main MRI correspond to the segments of decision makers described by Moore. The Micro MRI tracks the resilience (or vulnerability) of the Innovators of new non-consensus investment outlook and the Early Adopters as they adopt the new non-consensus view. The Macro MRI tracks the resilience of the Early Majority as it begins to adopt the new non-consensus outlook.
The Early Adopters and Early Majority are the most important segments of the population of investors. By the time the Late Majority adopts the new outlook it is, by definition, no longer a non-consensus outlook. Portfolios positioned to take advantage of the outlook will no longer experience significant price gains.
Using the MRI, and other MRI-related variables, CPM can determine the expected resilience of a market over a three- to 15-week horizon. 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.
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 these patterns of human behavior is sufficiently strong that there is reduced need to respond to the news of the day over most periods.
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