The Shorts Have Left the Building

The New York Stock Exchange issued its latest short interest report on Tuesday, and it showed that short interest has reached its lowest levels since January of this year. Many bulls may think this is a good sign, as fewer investors are betting against a market decline. However, short interest reached its highest level of the year toward the end of June, just before the market put in a gain of more than 7% for the month of July.

Like many market data points, short interest often serves as contrarian market indicator. There are two schools of thought that often make this scenario play out. First, as bearish bets against the market rise, there comes a point where the shorts are "all in," and there are few investors left who are looking to short. When this happens, a quick rise in the markets can lead to a "short squeeze," in which short sellers look to cover their positions in fear of losing profits or incurring greater losses. This squeeze induces a short covering rally in which short interest rapidly declines.

On the other hand, short interest also serves as a buffer against rapid declines in the market. This happens because short covering has an equivalent effect to stock buying. So as short sellers cover profitable positions, they are essentially serving as a buffer for stocks by buying back shares.

The takeaway is to be wary of making bearish or bullish bets on stocks with extremely high short interest. There is obviously a reason investors are betting so heavily against these companies, but there's a big chance that you're already late to the shorting party -- and in danger of a serious squeeze. Below is a list of stocks in the S&P 500 that currently have the highest short interest as a percentage of their float. Let the buyer (or short seller) beware.

Source: Capital IQ, a division of Standard & Poor's, and author's calculations.