Shorts Are Re-Emerging in Emerging Markets

Bullish energy was abound at the start of the year with the re-opening of China’s economy. However, short sellers are re-emerging, putting bearish pressure on emerging markets (EM).

The momentum behind China’s re-opening could be losing steam. Given that China is essentially at the tide that lifts all boats in EM, it’s warranted that short interest in China also translates to short interest in the entire EM space.

“Investors have added almost $600 million to bets that an emerging-market index dominated by Chinese stocks will lose money,” a Bloomberg report noted.

As such, short sellers have been on the attack, particularly when it comes to EM exchange traded funds (ETFs).

“Short selling of the $71 billion Vanguard FTSE Emerging Markets ETF, which tracks an index heavy on Chinese A shares, surged in the past six weeks to $1.12 billion, or 1.6% of the fund, according to IHS Markit data,” the Bloomberg report added. “That leaves it the most shorted in 13 months, the data showed.”

There was a lot of optimism around EM as the comeback trade heading into the start of 2021, as seen in the MSCI Emerging Markets Index, which surged near the end of a pandemic-ridden year. The index rose above 50% before heading into a bearish spiral over the past three years.

Still, the index is managing to live off its early 2021 gains with just under a 9.5% gain for the past three years. A strong dollar amid rising inflation and interest rates certainly helped with the bearish pressure.^MSEM Chart

Trade the Bearish Trend

Traders looking to tail the bearish trend of other short sellers can use inverse ETFs. For EM in particular, they can use the Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ), which seeks daily investment results of 300% of the inverse of the daily performance of the MSCI Emerging Markets Index.

Despite short sellers hopping on the EM bear train, the MSCI Emerging Markets Index is eking out a small year-to-date gain of 2.64%. If somehow EM can break out of the bearish pressure, then traders can also go the other direction with the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC).^MSEM Chart

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