Although overall short interest fell slightly over the last two weeks, several major financial stocks have seen large increases in short interest as investors reset portfolios prior to the start of the upcoming earnings season.
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Overall Data
The latest data shows that short interest on the NYSE dropped by nearly 3% in the period ending June 30, 2010, while short interest on Nasdaq stocks was up by 0.1%.

The Companies
Legg Mason (NYSE:LM) saw one of the largest short increases in the financial sector. Short interest now totals 17.8 million shares at the end of June 2010, up 31% from 13.5 million two weeks earlier. Eleven per cent of the company's shares are now sold short.

Legg Mason just reported total assets under management of $645 billion for the period ending June 30, 2010. This was down slightly from a year earlier. The asset manager stumbled badly during the equity bear market and the stock is still trading far below its all time high of close to $130 per share back in 2006.

Investors have also increased short interest in CapitalSource (NYSE:CSE), with 7.5 million shares sold short, up 55% from 4.8 million at the last report. Capital Source lost $212 million in the first quarter of 2010, as the company continues to suffer from its legacy commercial real estate portfolio.

Bearish investors also increased their bets against Knight Capital Group (NYSE:KCG) over the last two weeks, with short interest up 15% from 8.3 million to 9.6 million shares. Knight Capital Group reported strong gains in trading volumes in May 2010, with overall volume up 23% from last May.

Short interest on Radian Group (NYSE:RDN) increased 24% from 8.8 million to 10.8 million shares, with 8.2% of the outstanding shares sold short. Radian Group saw its stock pounded by the recession and financial crisis like most other insurers. However, the company has recently made positive comments on the mortgage insurance business and indicated a possible stabilization in the industry.

Ambac Financial Group (NYSE:ABK), didn't see an increase in short interest at the end of June 2010, but the company has an incredible 23% of its outstanding shares sold short. Such high levels of short interest may lead to a short squeeze, a situation where many investors attempt to buy stock to cover a short position at the same time, forcing the price up sharply.

The Bottom Line
The overall level of bearishness, as measured in total short interest, fell at the end of June 2010. Despite this shift, many stocks saw large increases in short interest as investors picked winners and losers for portfolios prior to the start of earnings season. (Learn more about short metrics in Short Interest: What It Tells Us.)

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