What the short interest surge may really signal

With stocks near all-time highs, short interest reached the highest level in 20 months, but some investors are seeing the trend as a bullish sign.

Short interest increased 2.62 percent to 14.26 billion shares in the first half of February, the highest level since June 2012, according to NYSE Euronext. Similarly, short interest at the Nasdaq also showed an increase of 2 percent, rising to 7.26 billion shares.

"The increase in short interest as of mid-February is bullish as it signals that there is still a healthy degree of skepticism on the part of investors" says Paul Hickey, co-founder of Bespoke Investment Group. "We would be worried if the market saw some weakness and short interest declined."

Short interest measures the total number of shares of a security that has been sold short, expressed as a percent of total tradable shares.

Investors track short-interest levels to gain a sense of where a stock might be headed, along with some insight into whether any positive news might force short traders to cover their positions, pushing stocks higher.

There has been a lot of pain among traders who have been set up to short equities and Treasurys this year.

"Over the last several months, each time the market fell, short sellers have stepped in hoping to finally catch a meaningful decline" says Hickey. "Like Wile E. Coyote in his pursuit of the Roadrunner, every time they think they have a chance, the market turns around."

In just February alone, the most heavily shorted stocks rallied an average of 6.67 percent, which is more than 200 basis points greater than the 4.61 percent increase for the S&P 1500.

Hickey believes short sellers will eventually be proven right, but it has been a painful wait.

Below is a look at some of the most heavily shorted stocks in the Russell 1000.

—BY CNBC's Giovanny Moreano and Pradip Sigdyal. Follow Giovanny on Twitter: @giovannymoreano