The S&P 500 is on track for its best weekly gain since July, but if history is any indication, those gains may evaporate on Monday.» Read More
Demand for small-cap stocks is increasing relative to established large-cap names, a divergence that signals continued risk appetite among investors.
The Russell 2000 index hit a new all-time high of 1,212.82 on Tuesday for the eighth time this year, surpassing its previous high set on Feb. 28.
So far in 2014, the Russell is up 3.5 percent, compared with an increase of 1.4 percent for the S&P 500 and a decline of 1.3 percent for the Dow. The Nasdaq composite is currently leading the market, up 4.3 percent.
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."
U.S. stocks surged Monday, with the S&P 500 surpassing its Jan. 15 high on a rally led by cyclical names.
Among the winning sectors—health care, material, consumer discretionary and energy are all up better than 6.6 percent from their recent lows.
"The rally to new intraday highs still reflects, I think, an enormous faith in the Fed," Peter Boockvar, chief market analyst at The Lindsey Group, said in an email.
February is historically a rocky month for stocks, but it's bound to perform even worse when January is negative.
Since 1971, when January was negative, the S&P 500 extended its losses into February 72 percent of the time, falling on average 2.4 percent. That ratio stands at 65 percent for the Dow and 57 percent for the Nasdaq.
U.S. stocks are on pace to close a volatile January in the red, after posting the best yearly gain in 16 years.
With less than two hours until the end of trading Friday, the S&P 500 was trading around 1790, down just over 3 percent for the month. It is on track for its first January loss since 2009, and the largest monthly decrease in eight months.
Similarly, the Dow is off by almost 5 percent this year, while the Nasdaq has fallen 1.5 percent.
As January goes, so goes the year?
As China welcomes the Year of the Horse, investors may want to note that historically it hasn't been the friendliest for stocks.
China's Lunar New Year, or Spring Festival, begins Friday, marking the start of the year 4712.
After a temporary drop in the last six weeks of 2013, short interest is back on the rise.
The NYSE reported on Monday that short interest rose to 13.8 billion shares in the first half of January from 13.41 billion on December 30, a 2.98 percent increase – the biggest such bi-weekly increase since mid-June of last year.
Likewise, Nasdaq also showed a modest increase of 0.5 percent in short interest during the same period. As of mid-January, short interest rose to about 7.62 billion shares, compared with 7.58 billion shares as of December 31.
(Read more: Betting against Apple? Not so fast: Ex-CEO Sculley)
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.
Here is a look at the most heavily shorted stocks:
If history is an indication, the stock market could extend its rally into 2014.
U.S. stocks are up for a sixth-straight session, with the Dow gaining 3.4 percent, or its strongest six-day win streak since March 2012. So far this year, the S&P 500 is up 29 percent, on pace for its best yearly performance since 1997, while the Dow is up 25 percent, or its biggest annual gain in a decade.
The Dow Jones Industrial Average is on track to end the year with its biggest percentage gain since 1996 and is almost certain to have its best year in a decade.
If it closes on Dec. 31 above 16,422.11, the Dow will beat its 25.32 percent surge in 2003.
That would make it the best year since 1996, when the Dow gained 26.01 percent.
As the S&P 500 continues to trade near record highs, short interest appears to be on the rise, again.
NYSE Euronext reports short interest rose more than 1.53 percent in November to 27.84 billion shares, its largest amount in five months.
Just in the last two weeks of November, more than 43 percent of S&P 500 stocks saw an average 10 percent increase in short interest.
This year has not been kind to short sellers, which have seen the S&P jump 24 percent, or its largest gain in a decade.
But some investors believe the tide may change. Hedge fund manager Bill Fleckenstein recently told CNBC he was restarting his short fund, while hedge fund titan Jim Chanos said he's finding many more opportunities on the short side.