Since hitting a low in mid-July, the S&P 500 Financials Sector is up nearly 30% (see chart below of XLF , an ETF that tracks the financial sector). This run up is putting a lot of pressure on short sellers, who have increased their short positions significantly in the past few months.
Despite the recent run up, data from Thomson Reuters shows that short positions for some of these banks are still nearly double what they were six month ago. Wachovia's short interest is over three times what it was in February.
Over the past month, only the short interest in Merrill Lynch has significantly been reduced, primarily due to an increase in shares outstanding. If the shorts continue to be squeezed, you may see a further run up in the financials as they try to cover their positions. Alternatively, more bad news from the banks may provide them the relief they need.