As you are aware, I believe in using 2:1 leverage during periods when my timers are long. Over the long run, my US timer has produced better results as far as compound annual growth is concerned when applied to the Russell 2000 than other US stock market indices. It would therefore make sense to use leverage when my US timer is long and buy IWM. The following chart illustrates the equity curves generated by using leverage and by not using leverage. When my US timer is short, IWM is shorted but not with leverage.
The leveraged model is based on 2:1 leverage at 5% interest when my timer is long. The compound annual growth rate of this leveraged model is 24.5% versus 2.1% for the Russell 2000. This leveraged model has a maximum drawdown of 20.3% versus 59.9% for the index.
Now, what are the caveats. Market timing is more difficult psychologically than most investors would believe. If you haven’t already read my last post I strongly encourage you to do so as it provides an excellent discussion of the mental challenges faced by market timers.
FJP
