It may seem ironic, but nothing sends bears scrambling for cover like rising stock prices.
Short interest dropped dramatically at Baidu (NASDAQ:BIDU) during the latter half of last month. The number of shares sold short of China's leading search engine shrank from 15.5 million in mid-July to just 9.8 million by month's end.
They weren't covering on their terms. Pessimists weren't moving on because their bearish scenarios had been met. The stock actually soared more than 30% during the last half of July. Yes, the same folks betting against the company deeming it too expensive abandoned their positions because it got even more expensive.
It may have seemed easy to bet against Baidu earlier this summer. The former dot-com darling was seeing its dominant market share being nibbled on by the surprisingly pesky Qihoo 360. With Qihoo's new search engine making noise, doubters began to question Baidu's weakness in mobile. It also didn't help that Baidu's earnings fell short of expectations in the two prior quarters.
However, Baidu's redemptive path has been quick. It burned the naysayers last month by making a needle-moving acquisition in mobile and posting better-than-expected financial results for the first time since late last year.
It's a good thing that the skeptics covered, since the stock has gone on to hit fresh 52-week highs this month.
China will always have its challenges for investors, but the growth is hard to deny.
Shares of SINA (NASDAQ:SINA) -- another Internet bellwether that has had its ins and outs with market momentum -- opened 7% higher after posting strong financials and providing a healthy near-term outlook.
However, unlike the second thoughts creeping into the minds of Baidu's cynics, SINA saw its short interest move higher during the second half of last month.
That's just as well. A little bit of pessimism is healthy. A lot of pessimism is sometimes even healthier, especially when it helps trigger the short squeeze rally that helped deliver a 30% pop in a little more than two weeks last month for Baidu's believers.