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Short sellers covered 7.6 million shares of Magnum Hunter in the past week

|Includes: Citigroup Inc. (C)

Shares of Magnum Hunter (MHR) borrowed in the securities lending market have declined from 18.6 million to 11 million shares over the past week as short sellers have purchased shares in the market and returned them to institutional investors / lenders.

Despite this short covering which provided support to the share price, MHR has still lost almost 10% on the week.

Short interest stood at 18 million shares at the end of April, so we'll have to see whether short interest drops close to 11 million when mid-May figures are reported in a week by the exchanges.

As shown in the chart below, short activity in MHR took off in mid-January when shares borrowed spiked from 5 million shares to 15 million shares from January 18 to January 25.  Short interest activity continued to increase over the next couple months.  The cost-to-borrow has also declined right along with shares borrowed, indicating that there is reduced demand to borrow and sell short. 

(If hypothetically the cost-to-borrow had remained high and shares borrowed declined, this would have indicated that lenders were recalling their shares, putting pressure on short sellers to find shares elsewhere.  The conclusion in this hypothetical case would be that short sellers continue to believe that the shares are overvalued...AND long investors now believe the same thing and are recalling shares to sell them and get out of the stock altogether.)

As this is not the case with MHR, it seems that those short sellers who covered 7 million shares are reconsidering their short position and covering because they do not think the shares of MHR are overvalued.