Sophia’s Thoughts on Sell in May & Go Away

Is there truth to the popular “Sell in May and go away” narrative? Or will this go around be different?

These are Sophia’s Thoughts:

• “Sell in May and go away” reflects a belief whereby crypto trading liquidity and investor returns typically decline during the summer months.
• We crunched the data and found some evidence in support of the “Sell-in-May” narrative. Our analysis reveals that, for the most part, investors stand to gain more by shorting coins in May and over the summer.
• But this summer may be different due to key regulatory decisions on the ETH spot ETFs and CPI data, which could influence the Federal Reserve’s interest rate decisions.

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🚀 Last week’s market performance

Last week, the crypto market lost 0.6% while Bitcoin (BTC) lost 1.0%. Render (RNDR), the distributed GPU rendering network, led the market gaining 25.4% this week. The worst performing coin of the week was Neo (NEO), the smart contract and dApp coin, which lost 16.1%.

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📉 Sell in May?

As summer approaches, the crypto community is buzzing with the seasonal downturn maxim: “Sell in May and go away.” This sentiment is grounded in the belief that trading liquidity and investor returns typically dip during the summer months.

André Dragosch, Head of Research at ETC Group, highlights that between June and September crypto has historically seen notably lower returns in the crypto market compared to other months: “The summer months, between June and September, have historically brought significantly lower investor returns than other months of the year.”

Expanding on this, Nic Puckrin co-founder of Coinbureau shared in a discussion on X that over the past five years, buying Bitcoin in October and selling in April yielded cumulative returns of 1,449%, while buying in May and selling in September resulted in a 29% loss. Additionally, Puckrin highlighted the current market dynamics stating that “Daily trading volume & volatility has fallen to 2-month lows and futures premiums have fallen to 3-month lows,” pointing out that institutions are less bullish and retail sentiment is waning.

The underlying reasons for this seasonal behavior are multifaceted. Historically, summer in the northern hemisphere is a period when many traders and institutional investors take holidays, leading to reduced trading activity and liquidity. Furthermore, major financial players such as institutional investors might also scale back their operations during the summer months. The fiscal year for many institutions does not align with taking significant new positions during this period, leading to a natural decline in large-scale investment activities. This reduction in market participation can lead to a stagnation in price movements, as we highlighted when we reviewed the summer of last year.

📊 What does the data say?

We took a deep-dive and analyzed what the data has to say about the sell-in-May idea. We first looked at how much potential there is to gain by optimally timing the market in May. Consider a hypothetical oracle that, at the start of a day, exactly knew which coins would gain and which coins would lose over the course of the next 24 hours. Such a perfect oracle would ideally engage in market timing: they would buy the coins that will gain and short the coins that will lose. Our analysis of the data going back to 2018 shows that a perfect market timer could earn 4.45% on average each day in May. That’s a huge return, but it is obviously unattainable as no investor is a perfect oracle. Still, this analysis tells us how much scope there is to earn profits trading cryptocurrencies in an average May month.

We break down the market timing return to see whether the perfect oracle would earn more by buying coins that will gain versus shorting coins that will lose. We see that, in an average May month, the perfect oracle earns 53% of its market timing returns from shorting losing coins. This suggests that, indeed, there is something in the data that’s consistent with the selling-in-May narrative.

In an additional analysis, we look at the returns that a perfect oracle would earn in all other months. On average, a perfect oracle can earn 3.7% per day through market timing. Half of this return comes from buying winning coins and the other half from shorting losing coins. In addition to May, a perfect oracle would earn more than half of the market timing return through shorting in the months of June, August, September, November, and December. These are most of the summer months in the northern hemisphere as well as the big holiday months at the end of the year, which are consistently slow.

All in all, our analysis indicates that, indeed, the data appears to support the sell-in-May narrative. At least in the recent history since 2018, investors generally stand to gain more by shorting coins in May, the summer months of June, August, and September, as well as the holiday months of November and December. But this may not be the full story now as there are several key developments on the horizon.

🤨 This May could be different

This summer may diverge from typical seasonal slowdowns due to regulatory developments. Most notably, the SEC is on the brink of decisions regarding ETFs tracking the spot prices of cryptocurrencies with VanEck’s and ARK Investment Management’s applications. The verdicts are expected on May 23 and May 24, respectively. These decisions could catalyze a surge in market activity by providing an additional mainstream investment avenue into cryptocurrencies. But it’s not 100% clear that the SEC will approve these spot ETFs now, giving rise to some uncertainty.

The upcoming Consumer Price Index (CPI) data is due for release on May 15. It is set to play a role in shaping the Federal Reserve’s monetary policy decisions in the upcoming June meeting. This CPI data will indicate whether inflation is aligning with the Federal Reserve’s goals, which will influence potential adjustments in interest rates. Right now, the market is expecting rate cuts as early as September.

A potential decline in headline inflation could reassure the Federal Reserve that its current policies are steering inflation towards their 2% target, despite persistent high inflation that had cast doubts on expected rate cuts. The narrative shifted slightly with the latest job growth data which indicated a slower than expected growth in April. This underperformance relieves pressure on the Federal Reserve to maintain higher rates, potentially opening the door for rate reductions sooner rather than later if inflation trends downward consistently. The Fed has expressed a desire for “greater confidence” that inflation will continue its downward trajectory before enacting rate cuts.

The CPI data for May could be influential. Early indicators suggest a possible decrease in headline inflation, partly due to lowering energy costs early in the month. These trends are still subject to change as the month progresses. This forthcoming data could provide the Federal Reserve with the confidence needed to adjust interest rates which would have significant implications for liquidity and investment in risk assets like cryptocurrencies.

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