Shorts Getting Longer as Stock Market Bears Throw In the Towel

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Part of the reason the market rally has been so durable is that many investors have been slow to return to stocks, allowing for a gradual melt-up that has prevented things from overheating.

One measure of sentiment, though, is indicating that the bearishness may be running its course.

Short interest as a percentage of total available shares reached a 12-month low of 3.6 percent as a profitable March ended, according to Bespoke Investment Group.

The finding sends two potentially important messages: that investors are finally buying into the rally (a contrarian signal); and that a good portion of the recent move probably came from a short-squeeze in which those betting against the market had to cover their positions.

(Read More: Cramer: This Stock Is in the 'Squeeze of a Lifetime')

Neither provides a certain sign that the seemingly unstoppable rally is coming to a close anytime in the immediate future. But they do give still more fodder to those who wonder when the market will take a breather and allow a better entry point for those on the sidelines.

"The shorts are definitely covering on this recent rally," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. "That would be a sign that some of the big potential buying pressure is out of the way. But we're not ready to throw in the towel yet."

The rally has tested the courage of even the most stubborn bear, shrugging off bad news with aplomb and rocketing higher, despite persistent signs of a weakening economy.

(Read More: What to Do in Market Where No News Is Bad News)

In fact, many traders chose to focus Thursday on another strongly contrarian sign, though this time favoring the bulls: a huge surge in pessimism from the closely watched American Association of Individual Investors.

The most recent AAII survey showed market bears popping up to 54.5 percent, its highest level since July 8, 2010, which marked a low on the Standard & Poor's 500 that has not been breached since. Traders took the move to signal a washout for the bears that could precede another sharp move higher.

"It's stunning how wrong retail ([investors] can be," said Dave Lutz, managing director of trading at Stifel Nicolaus. "It's the old adage that the market is going to do whatever wounds the most participants."

A few caveats about the AAII survey: The participant level for the past week was less than half of the normal because of an email glitch at the poll conductors. The bearishness level was not confirmed by the Investors Intelligence survey of newsletter writers, who remain strongly bullish by a 50.5 percent to 20.6 percent margin.

"Though there is a correlation ... between extraordinary sentiment readings and market reversals, as is the case with any single market indicator, the correlation is not perfect," said Charles Rotblut, vice president and editor at AAII. "Therefore we would consider other indicators and factors before making any judgment on the short-term direction of stock prices."

(Read More: Stocks, Bonds Tell Two Stories; So Who's Right?)

The main factor for investors nowadays seems to be liquidity from the Federal Reserve, which is pumping $85 billion a month into Treasurys and mortgage-backed securities to keep interest rates anchored around record lows and to encourage investment.

"The astonishing strength of financial assets at a time of economic weakness is best explained by the astonishing level of monetary policy intervention," Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, wrote in a note to clients. (Like many others, BofA maintains a long-term bullish view but warns that a near-term correction looms.)

The Fed has not been alone in its extraordinary easing measures, with global central banks cutting interest rates more than 500 times over the past six years, said Hartnett, who pointed out the disparities between market performance and the economy.

(Read More: United States, Japan Now Money Printing Allies)

For instance, Friday's jobs report showed the unemployment rate falling to 7.7 percent, largely because the percentage of people working or searching for work hit its lowest point in 35 years.

The stock market disregarded the bad news, though, with the S&P 500 rising more than 3.5 percent since an early swoon after the report was released. Transportation stocks, considered a bellwether of economic activity, have surged more than 5 percent despite the weakening jobs picture.

"Wall Street is booming," Hartnett said. "Main Street is not."

-By Senior Writer Jeff Cox. Follow him on Twitter @JeffCoxCNBCcom.