Even with banking and financial stocks at unprecedented heights, short- sellers have been unwilling to bet against the sector.

Short interest in banking and related companies traded on the New York and American Stock Exchanges edged up just 0.7% to 173.4 million shares in the month ending June 13, according to the American Banker monthly tally of exchange data.

Short interest in all Big Board stocks was up 5.4% and short interest in Amex stocks rose 7.7%. (See tables on page 28.)

Short-sellers create a rise in short interest by borrowing shares and quickly selling them-hoping to profit by replacing the shares when prices fall.

One would expect short-sellers to be focusing on bank stocks, on the theory that what goes up must come down. The American Banker bank index was up 13.1% and the thrift index up 7.4% during the period in question, when there was a major stock market rally.

But analysts said short-sellers may have lost their nerve in the extended bull market. "Short sellers in recent years have gotten beaten up pretty badly," said one.

Another factor that could have offset short interest was a dip in new share repurchase programs, the analyst noted.

Short interest in a number of big banks has skyrocketed as institutions arrange for advisers to borrow shares in a strategy aimed at accelerating repurchase programs.

One would expect short interest in these companies to decline as the borrowed shares are replaced-or "covered," in market parlance-and this appears to have been the case for NationsBank. Short interest in the Charlotte, N.C., regional bank jumped last year, when the bank initiated a share repurchase. With no new purchases taking place, short interest in NationsBank declined by 1.4 million shares in the latest month to 13.3 million, the fifth largest decline in the banking and financial sector.

Short interest in banking and financial stocks traded on the Nasdaq system rose, however, by a substantial 9.8% to 84.23 million shares. But that rise was apparently not due to pessimism about the sector. A rise of nearly five million shares in the short interest in Washington Mutual Inc. accounted for two-thirds of the overall increase.

Analyst Campbell Chaney of Sandler O'Neill & Partners, noting that Washington Mutual won the bidding war for Great Western Financial in early June, said that arbitragers often short-sell the shares of buyers and buy the shares of targets in order to lock in the spread between the current price of the target and its eventual sale price.

Short interest in H.F. Ahmanson & Co., the losing bidder, dropped sharply in the period, he noted.

Mr. Chaney said some investors may be skeptical of Washington Mutual's ability to meet its earnings targets, based on the performance of other prominent acquirers such as Wells Fargo & Co., but termed it unlikely that savvy investors are betting that Washington Mutual will find a morass of bad loans at Great Western or otherwise stumble badly.

"If people that are shorting the stock are looking for more than execution risk, I think they're barking up the wrong tree," he said.

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