Sell in May and go away: True or false for crypto?
Stocks tend to underperform from May to October, but does this pattern apply to crypto? Should you time your selling based on a decades-old adage? Here’s our take on the Halloween effect and its predictive power. Spoiler alert: it is debatable.
Why “sell in May”?
Believers in the strategy sell risk assets as May rolls around (or in late spring) and hold on to cash proceeds to reinvest in late fall, after Halloween. Hence, the second name of this seasonal pattern — the “Halloween effect.”
The core argument is that stocks have historically underperformed from May to October. On average, the remainder of the year has been the top-performing 6-month rolling period. Some traders suggest the same thinking may benefit Bitcoin holders.
Origins of “Sell in May and go away”
The saying emerged around 1776, with the pattern traced to old England. Stockbrokers’ summer vacation would stretch from May to September, as the upper class worked during winters and escaped London’s heat. The original version —“Sell in May and go away, do not return until St. Leger’s Day” — referred to the final horse race of the season.
Stock Trader’s Almanac has popularized the approach, deducing the “best six months of the year” based on the performance of the Dow Jones Industrial Average. It cites “reliable returns with reduced risk since 1950” for those investing from November to April and switching to fixed income from May to October.
Stock market performance from May to October
The pattern has generally held in the stock market, as illustrated by the S&P 500. Since 1990, two growth phases for large-cap stocks, small-cap stocks, and global stocks have been observed:
- +2% on average from May to October
- +7% on average from November to April
As shown above, the returns have varied, and they have also fluctuated within both six-month phases. Overseas, experts note the same seasonal divergence.
In the last substantial decline from May to October (2011), the S&P 500 lost 8.1%, compared to just 0.3% in 2015, according to Investopedia. However, no other dramatic plunges were seen during that decade.
A 2018 academic paper concluded that the Halloween effect had “strengthened in the last 50 years,” while “the UK evidence reveals that investors with a long horizon would have remarkable odds of beating the market.”
Theoretically, investors may capitalize on the pattern by switching to less economically sensitive assets through the first phase. However, more recent analysis prescribes caution.
Biggest stock market crashes from May to October
The trend of weaker stock performance from May to October has been fairly prominent. Multiple stock crashes have occurred within the period:
- Black Monday and Black Tuesday in October 1929
- Black Monday in October 1987
- Subprime mortgage crisis following the collapse of Lehman Brothers in September 2008
- August 2011 correction after the downgrade of the US government debt rating
Notable exceptions: 2020 and 2022
The coronavirus pandemic disrupted global economies, financial markets, supply chains, and lifestyles. Over five weeks in February and March, the S&P 500 lost over a third of its value.
Between May and October, the index returned just 12.4%. That year sealed a decade in which the summer phase brought an average of 3.8%.
In 2022, the adage was off the mark again. The index lost 8.8% in April and 20% for the full year. As noted by Fidelity, among the 11 US stock market sectors, only energy stocks finished with gains.
Possible explanations of “Sell in May”
The days when agricultural patterns strongly affected financial markets are long gone, but seasonality — and the exaggeration of the strategy’s accuracy — may stem from other factors.
- Vacations. As traders and investors take summer vacations, less trading activity reduces liquidity while volatility grows. A similar phenomenon is the Santa Claus rally in December and January.
- Year-end events. These include reporting and business bonuses. In particular, the income tax filing deadline in the US is in mid-April.
- Human biases. Traders are also likely to remember their negative returns more vividly, as their psychological impact is much stronger. As stated by Dan Ariely, “Our emotional reaction to a loss is about twice as intense as our joy at a comparable gain: Finding $100 feels pretty good, whereas losing $100 is absolutely miserable.”
Criticism of “Sell in May”
While the May adage is well-known, experts caution against blindly following the calendar-based strategy. Here are the most common counterarguments.
- It does not beat buy-and-hold. Manulife Investment Management compares the strategy with the conventional buy-and-hold approach. As its calculations show, holding stocks for a certain timeframe — all year round, unless the fundamentals change — brings better results in the long run. Investopedia regards it as “the best course.”
- Its timing is too rigid. According to Fidelity, stocks record gains throughout the year “more often than not,” which renders selling in May pointless.
- It disregards the opportunity cost. Exiting and reentering the market entails additional expenses.
- It does not account for modern technology. Real-time monitoring tools let traders tweak their portfolios throughout the year more easily than decades ago.
- It disregards the context. Finally, like other calendar trends, the Halloween effect ignores the year’s unique economic backdrop, earnings outlook, business cycle, and market environment. Following it religiously is not a cautious approach.
Bitcoin’s May performance
So, does the principle hold any merit for Bitcoin? Looking at the monthly returns for May over the decade, there is no clear pattern for the period in question.
Since 2013, the coin has been six times in the red and five times in the green (seven times in the green since 2011, according to CoinDesk). This makes May the fourth-best month for Bitcoin. According to Alex Kuptsikevich, senior market analyst at FxPro,
“The average rise was 27%, and the average decline was 16%.”
The most dramatic May plunges came in 2018 (almost 19%) and 2021 (over 35%). The coin has bled in September the most often, with February and October being the greenest (only two instances of negative returns for each).
On the candlestick chart, the green candles appear to shrink, leading some to suggest a decline in maximum gains. Between 2021 and 2023, BTC spent May in the red.
Broader context is shifting
In recent years, growing institutional participation has transformed the Bitcoin market structure, particularly with the launch of spot ETFs in January 2024. Thus, entities and macro traders have more influence on the prices.
The perception of Bitcoin as a risk asset means bearish sentiment on Wall Street may translate into massive liquidations. Barron’s has concluded that “Bitcoin is, by and large, becoming more like the S&P 500.”
Like stocks, the coin is susceptible to geopolitics, bond yields, and macroeconomic drivers, such as the Fed’s monetary policy in the US. Due to lower entry barriers and growing adoption, its correlation with stocks has trended higher since the COVID-19 pandemic. So far, however, it has been unstable.
Wrapping up
Like other calendar-based strategies of stock traders, the Halloween effect disregards macro drivers — and factors exclusive to crypto like Bitcoin halvings. The decision to sell BTC in May must fit into one’s investment strategy, time horizon, risk tolerance, and financial situation.
Even if Bitcoin and stocks followed the same pattern, past performance does not guarantee future returns. Assess each investment opportunity on its own merit, focusing on how it may perform given the current macro and crypto-specific context.
Buying and holding is not the only alternative. Fidelity suggests another option — “sell in May and potentially stay.” Holders sell the assets they do not want to be in for the long haul, locking in a portion of the profits. Using that cash, they adjust the rest of the portfolio as needed, sticking to their strategy.
Check out our portfolio rebalancing guide for tips, and explore more insights below!
💡 Our guides to the Halloween effect and Santa Claus rally
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💡 Fed policy and Bitcoin in 2024: Impact of Fed pivots
💡 Crypto portfolio management: Rebalancing and other tips
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