Feb. Short Report: EWZ Shorts Jump 27%

March 13, 2012

Short-sellers, worried about an overvalued Brazilian real, ganged up on EWZ last month.

Short interest in the biggest Brazil ETF, the $10.6 billion iShares MSCI Brazil Index Fund (NYSEArca: EWZ), jumped by more than 27 percent last month, as investors expressed concern that the Brazilian real has strengthened so much in recent years that it may be posing a risk to the export sector of Latin America’s biggest economy.

However, overall, investors embraced emerging markets. For example, short interest on the $40.6 billion iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM), the second-biggest developing markets ETF, dropped by more than a third in February, in one of a number of signs in short-selling markets that investors are taking on more risk and grappling with the possibility that the global economy may finally be stabilizing.

Another expression of that more bullish sentiment was the 14 percent drop in the number of shorts on the CurrencyShares Euro Trust (NYSEArca: FXE), a long-euro ETF that has been under pressure as the eurozone’s debt crisis careened from country to country. But, as signs of a second bailout plan for Greece came into focus already last month, the drop left short interest at 174 percent of the ETF’s outstanding long float, compared with 268 percent in January.

The level of optimism has grown to the point where investors are starting to exit super-safe Treasurys for equities. As part of that trend, short interest on the iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT) is declining as well. Last month, the number of TLT shares short rose 4 percent. TLT is one of the ETF market’s more popular funds canvassing the long end of the U.S. Treasurys market. That rise came on top of a 33 percent spike in January. The percentage of TLT shares short were at 61 percent of its outstanding long float at the end of February, up from about 54 percent at the end of January. It’s quite likely that TLT could see a further increase in short interest, given that yields on 10-year T-notes have jumped in the past week to around 2.25 percent from around 2 percent.

The overall tone of the short-selling market—even accounting for the spike in EWZ shorts—suggested that short-sellers are recalibrating positions amid mounting signs that the global economy may slowly be stabilizing. While it might be premature to say the eurozone’s debt crisis is over, Greece is on the verge of a new bailout, and U.S. economic data—notably on the jobs market—is pointing to recovery, if not a full-fledged and robust economic recovery.

One of the most significant signs of a stabilizing macroeconomic situation is declining volatility. Futures contracts linked to the CBOE Volatility Index, or VIX, have dropped dramatically in recent months—in part because some investors are shorting the VIX. That phenomenon was in plain view last month in the exchange-traded product market, with shares short in the VelocityShares VIX Short Term ETN (NYSEArca: VIIX) spiking more than 300 percent. Nearby VIX futures are trading just above 15, according to the CBOE, where they trade. They were at 50 last summer, around the time of the U.S debt downgrade, and near 80 when the stock market collapsed.

Contrarians?

Emerging optimism about the world economy notwithstanding, short-sellers built up positions last month in the biggest and most liquid U.S.-listed equities ETFs, in what might amount to an underlying pessimism among some investors about where the economy is heading.

For example, short interest in the SPDR S&P 500 ETF (NYSEArca: SPY), the world’s biggest ETF, jumped 10.6 percent last month, leaving short interest at 44 percent of outstanding longs, compared with 38 percent in the prior month.

Similarly, shares short in the Nasdaq 100 ETF, the PowerShares QQQ Trust (NasdaqGM: QQQ), jumped almost 20 percent, to 15 percent of outstanding longs, compared with nearly 13 percent in January.

When taking in short interest data, it’s important to remember that data are buggy and flawed. Due to double-counting issues, it’s possible to have more reported short shares than actually exist in the market. Still, short interest data are great way to gauge sentiment.

Big Bets
Ticker Name % Float Short 1 Month % Change $Short ($, M)
SPY SPDR S&P 500 44.05 10.63 43,903.23
IWM iShares Russell 2000 105.44 5.50 16,894.60
QQQ PowerShares QQQ 15.20 18.25 5,057.67
XLE Energy Select SPDR 38.38 -0.99 3,241.42
XRT SPDR S&P Retail 292.41 7.64 2,746.14
EWZ iShares MSCI Brazil 18.39 27.42 1,945.76
IYR iShares Dow Jones U.S. Real Estate 52.51 -0.84 1,945.44
EEM iShares MSCI Emerging Markets 4.58 -35.87 1,873.19
TLT iShares Barclays 20+ Year Treasury Bond 61.31 3.96 1,857.48
XLF Financial Select SPDR 26.12 -11.09 1,668.99

 

Really Really Short
Ticker Name % Float Short 1 Month % Change $Short ($, M)
XRT SPDR S&P Retail 292.41 7.64 2,746.14
FXE CurrencyShares Euro 174.46 -14.32 578.43
XOP SPDR S&P Oil & Gas Exploration & Production 147.99 4.97 1,457.32
KCE SPDR S&P Capital Markets 145.14 -0.28 38.01
RKH Market Vectors Bank and Brokerage 119.99 -18.36 34.19
RTH Market Vectors Retail 118.28 13.47 97.93
IYT iShares Dow Jones Transportation Average 112.19 194.33 500.22
IWM iShares Russell 2000 105.44 5.50 16,894.60
VIIX VelocityShares VIX Short Term ETN 100.76 316.10 16.09
TYD Direxion Daily 10-Year Treasury Bull 3x 86.56 1.26 3.34

 

Data is believed to be accurate; however, transient market data is often subject to subsequent revision and correction by the exchanges.

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