In the current globally rising markets, investors are increasingly buying high-conviction single emerging country ETFs while utilizing the iShares MSCI Emerging Markets (EEM) ETF as a primary vehicle to hedge long exposures.

Similar to the EEM trend, short interest in the MSCI EAFE (EFA) is rising while its major constituents show mixed short interest trends.

Across both domestic and international markets, short interest data indicate a decline as prices rise, reflecting a momentum strategy with short covering (buying) to avoid losses.

With nearly all major countries up year-to-date (YTD), the current rally provides the critical backdrop for our short interest analysis.

When we examine the EEM and the constituent country indices—specifically Taiwan, China, Brazil, India, and Mexico—an interesting pattern emerges.

Short interest in EEM is climbing while short interest in the underlying countries is trending lower. This divergence suggests that investors are either rotating long exposure from EEM to specific countries or executing a "long country/short index" hedge.

By aggregating the country-level data, we can compare total short conviction to the overarching EEM ETF.

We observe a similar phenomenon in EFA: short interest as % of float is rising, whereas short interest in its constituents is mixed both up and down.

In contrast to the international country indices, major US indices like the SPY, IWM, and QQQ are seeing short interest decline, consistent with the global trend in individual countries.

Maintaining a smaller short position during a rally is a classic momentum strategy—covering to limit losses as prices rise shorting positions on the way down.

For the broad indices, however, the current trend reflects a momentum bias, with covering on the way up to hedge against a potential market rise.

For the SPY, QQQ, and IWM, short interest is meaningfully lower as momentum players exit positions following significant gains in these benchmarks.

Want to know more? Access this data in real time using S3’s BLACK APP & BLACK MAP

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (“S3 Partners”) to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks, and merits, as well as the legal, tax, accounting, and investment consequences, of such decisions.