Rallying stocks over the past few months may have spooked some of the naysayers, but the shorts are still out there.

Bearish investors short individual companies when they believe that shares will head lower in the future. Betting against stocks by taking short positions -- which essentially means selling stocks you don't own, and buying them back later to zero out your account -- is a logical (yet risky) way to cash in on down markets.

A stock with heavy shorting activity isn't necessarily a bad thing. Since shorts have to buy to cover their positions, a stock can tack on some pretty beefy gains if the shorting worrywarts all head for the exits at the same time. This is called a short squeeze.

Now that the mid-September short interest data has been published by the exchanges, let's take a look at a few companies with some of the largest bearish positions as of Sept. 15.

Citigroup (NYSE:C) - 177.5 million shares sold short
After all that Citi's been through, it's finally starting to shake off the cynics. As high as the nonbeliever count may seem right now, it's a pittance compared to the whopping 1.3 billion shares of Citigroup sold short in mid-May.

A lot has happened since then. Despite the dilutive preferred share conversion, analysts see Citigroup turning a profit in 2010, compared to the a deficit they were predicting three months ago. The banking giant has also joined its panhandling peers in making moves to partly repay the government's bailout.

The banking industry is unlikely to relive the gravy days that led to its globe-rattling selloff. However, Citigroup's gradually clearing the rubble.

Ford (NYSE:F) - 111.8 million shares sold short
The sturdiest of the three stateside automakers has also been oozing confidence these days. Three months ago, analysts figured that Ford would lose a whopping $0.42 a share next year. Now those same analysts are looking for a profit of $0.09 a share for 2010. Ford's CEO is targeting 2011 as its return to profitability, but you can't blame Mr. Market for its early jump on the enthusiasm.

Ford has delivered two consecutive quarters of blowing past Wall Street's profit expectations, and that was before the "cash for clunkers" rebates lit a third-quarter fire under the industry.

Sirius XM Radio (NASDAQ:SIRI) - 106.5 million shares sold short
If you think the bears are encircling the satellite radio giant today, you should've been here a year ago, when 236.2 million shares were sold short.

Sirius still commands the largest volume of shares sold short of any Nasdaq-listed company, though its low share price and high share count factor into the girth of that nine-figure sum.

DirecTV (NYSE:DTV) - 83.9 million shares sold short
Short interest is at a 52-week high at DirecTV, but it's hard to justify the pessimism. The leading satellite television provider is profitable. Unlike smaller rival DISH Network (NASDAQ:DISH), DirecTV is actually growing its subscriber base during the recession.

Its valuation is more than reasonable, fetching just more than 12 times next year's projected earnings.

Over the weekend, The Wall Street Journal speculated that Verizon (NYSE:VZ) may want to acquire DirecTV. Nothing smokes out a short squeeze faster than fears of a premium buyout, even if the chatter proves bogus.

E*TRADE (NASDAQ:ETFC) - 72.4 million shares sold short
The popular discount broker had 343.8 million shares held short at the end of August, so clocking in with just 72.4 million bearish wagers two weeks later is a major improvement.

E*TRADE's recent capital-raising moves may have played a part in the disparity, but the important takeaway is that the worst may be over for the Web-based discounter. Its retail brokerage business is growing, even if many investors still can't get over its mortgage-based woes.

Tall tales of short stories
All five of these companies are in better fiscal shape than they were earlier this year. The stock prices bear that out, with Ford, Citigroup, and Sirius multiplying several times over since their springtime lows.

There may be a lot of pessimistic bets out there on these companies, but all of them have been brutally wrong since the markets began to rally in March.

There's nothing wrong with shorting a stock, provided investors have a firm grasp of the concept and a firmer conviction that the companies shorted will be less valuable in the future. In today's market, however, that trend is heading in the opposite direction.

Watch out for squeeze plays.

Longtime Fool contributor Rick Munarriz doesn't mind sifting through the unloved for a good buying opportunity. He does not own shares in any of the companies in this story. He is also part of the Motley Fool Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.