Tickers in this Article: WABC, ZION, ADS, ACX, XRX, BAC, C
As the financial crisis recedes into the past, investors may have cut back short positions on some of the larger financial institutions but still maintain significant short bets against some smaller financial institutions in the banking and non-banking sub-sectors.

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The number of shares sold short for Citigroup (NYSE:C) has fallen from the 1.2 billion share range in the spring of 2009, to the 177.5 million shares reported on September 15, 2009. Short interest also fell for Bank of America (NYSE:BAC) over the last two weeks by 18%, from 100.8 million to 82 million shares sold short.

It's possible that some short sellers got tired of fighting against the tide of government support for the larger banks and became convinced that the government would be enforcing its informal "too big to fail" rule. Or maybe the short side is simply resting and reloading, waiting for the equity rally to peter out before reinitiating positions.

The Biggest Smaller Short
The largest short bet among the smaller banks is Zions Bancorp (Nasdaq:ZION), where 27% of the outstanding shares are sold short, as of September 15, 2009. Its total of 33.7 million shares sold short is up 10% from the beginning of September, and would take nearly six days to cover.

Another smaller bank being targeted by short sellers is Westamerica Bancorp (Nasdaq:WABC), where 5.6 million shares, or 19% of the shares, are sold short. Although, this percentage has been stable the last few months, the short position would take 34 days of volume to cover.

Westamerica Bancorp is an interesting short candidate, as the bank recently repaid its preferred stock that it issued to the Federal Government as part of the Troubled Asset Relief Program (TARP), and is trading close to its lifetime high price in the upper $50s per share.

The strong performance may have been caused by a short squeeze in the stock, a situation where many short sellers rush to buy stock to cover their positions and thus force the price higher as they scramble for shares.

Shorting Isn't Just For Banks
On the non-bank side of the financial sector, Alliance Data Systems (NYSE:ADS) has 27% of its shares sold short. Alliance Data Systems operates several different businesses, including a private-label credit card business and a reward miles program. The stock trades at only 10 times 2010 estimated earnings of $6.05.

One lucky break for short sellers was the lack of short involvement with Affiliated Computer System (NYSE:ACS), which was purchased by Xerox (NYSE:XRX) at a 34% premium on September 28, 2009. Only 1.2 million shares of this information technology company were sold short.

The Bottom Line
Short sellers continue to cut short bets on the largest banks and financial institutions, but are still targeting the financial sector through selling short the smaller and perhaps less protected institutions. (To learn more, see When To Short A Stock.)

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