May 29 (Bloomberg) -- Short sellers are betting against U.S. stocks like never before as the Standard & Poor's 500 Index approaches an all-time high. That's making some of the biggest bulls even more optimistic.

``What the short seller appears to be doing is doubling down,'' said Kenneth Fisher, who oversees about $40 billion as chairman of Fisher Investments in Woodside, California. ``You love to see it, because if you believe there is a basic driver to the bull market, they're going to get run over.''

The amount of shorting -- where traders sell borrowed stocks expecting to buy them back after prices fall -- jumped to 3.1 percent of the total shares listed on the New York Stock Exchange this month. That's the highest since at least 1931, according to Bespoke Investment Group LLC, a research firm in Mamaroneck, New York.

The wagers represent billions of dollars that could be invested in equities if short sellers close their positions. The bears also reassure fund managers who get skittish when few traders anticipate the possibility of a stock market decline.

Leuthold Group, which advises two-thirds of the biggest U.S. money managers, uses data on speculators betting against stocks as an indicator for prices. The higher the short sales compared with the average monthly trading on the NYSE, the better the opportunity for profiting from owning shares, according to the Minneapolis-based firm. Leuthold's ratio is the highest since at least 1998.

`Buying Frenzy'

``Ultimately you have to cover the short positions and that tends to create more of a buying frenzy,'' said Andy Engel, co- manager of the Leuthold Core Investment Fund, which has outperformed 99 percent of similar funds over the past five years.

The S&P 500 has climbed 6.9 percent this year, extending four years of gains that pushed it up 95 percent. The index fell 0.5 percent last week to 1515.73, leaving it less than 12 points from the record reached on March 24, 2000. The Dow Jones Industrial Average retreated from an all-time high, losing 0.4 percent for the week to 13,507.28.

James Paulsen, who oversees $175 billion at Wells Capital Management in Minneapolis, expects the S&P 500 to reach 1650 this year, partly because investors betting on declines aren't acknowledging that stocks are cheaper relative to earnings than in 2000 when the Internet bubble popped.

Shares of companies in the S&P 500 trade at an average 17.8 times earnings, compared with 32.8 times at the end of the last bull market, according to data compiled by Bloomberg.

`Bloody Optimism'

``The last time we were here there was bloody optimism everywhere and enthusiasm about the future, and everything was going to go up,'' said Paulsen, chief investment strategist at Minneapolis-based Wells. ``Today it couldn't be any more opposite. It's a pretty good environment.''

Losses are mounting for traders speculating on a drop in stocks. So-called short interest on the NYSE rose to a record 11.8 billion shares as of May 15, 7 percent more than a month earlier, according to the world's biggest exchange.

Hedge funds that focus on shorting lost 35 percent from September 2002 through the end of April, according to the Credit Suisse Tremont Hedge Fund Dedicated Short Bias Index. That compared with an 82 percent gain for the S&P 500 in the same period. The funds are the worst performers this year among 10 hedge fund strategies tracked by the Credit Suisse/Tremont Hedge Fund Index, dropping 1.1 percent.

`Highly Confident'

``Short selling has never been more difficult,'' said David Tice, whose $680 million Prudent Bear Fund has lost 23 percent including dividends since the start of the bull market. ``We come in every day and sometimes we say `another day, another record.' But we've seen this movie before, so we're highly confident.''

Tice, whose Dallas-based fund generated a 168 percent return during the last bear market, is shorting Detroit-based General Motors Corp., the biggest U.S. automaker, and Sunnyvale, California-based Advanced Micro Devices Inc., the second-largest maker of computer microprocessors.

U.S. interest rates that reached a four-decade low of 1 percent in 2003 allowed consumers to spend beyond their means, padded corporate profits and set off a record wave of buyouts that inflated share prices, Tice said.

The Federal Reserve raised its benchmark overnight lending rate 17 times starting in June 2004, and has maintained a rate of 5.25 percent since June. Consumer borrowing increased in March by the most in four months as Americans charged to credit cards.

Companies announced $1.06 trillion of U.S. takeovers in 2007 through last week, 63 percent more than at the same point last year, when buyouts reached an annual record, data compiled by Bloomberg show.

`Precursors Are There'

Tice says the S&P 500 would have to fall at least 50 percent for him to consider dropping his bearish stance.

Anthony Bolton, who helped turn Fidelity International Ltd. into the largest U.K. mutual fund company, said this month he's shorting some of the shares in the 3.2 billion-pound ($6.4 billion) U.K. Special Situations Fund because too much money is being spent on mergers and acquisitions.

``I can't tell you when it's coming but I can tell you the precursors are there'' for a slump, Bolton said at a dinner in London.

Leuthold's research suggests those concerns are overblown. The firm's NYSE short-interest ratio stood at 1.46 when the S&P 500 reached its peak in March 2000, and fell to 1.39 in January 2001, a full 21 months before the S&P 500 bottomed. Now, the ratio has stayed at 2.94 for two months, the highest since at least 1998.

Assets Balloon

The company, which accounts for the increase in the number of hedge funds using short-selling strategies during the past decade, considers a ratio above 2.45 bullish and below 1.8 bearish.

Assets managed by hedge funds ballooned to $1.57 trillion, more than double the amount in 2001, estimates by Chicago-based Hedge Fund Research Inc. show. Some investors say the growth of the loosely regulated investment partnerships that can buy, sell and short any asset and that allow managers to share in the profits helps explain the increase. It also makes the information less useful for predicting market performance.

``You have to take that with a grain of salt,'' said Russ Koesterich, who helps manage $1.8 trillion at Barclays Global Investors in San Francisco. ``More participants are shorting. That may be having some impact on distorting the data.''

Mergers and acquisitions increase the likelihood that short sellers will get burned, according to Robert Froehlich of DWS Scudder, which oversees $321 billion.

``Anyone that did the theory, `sell in May and go away,' they're going to wish they never read that,'' Chicago-based Froehlich said. He expects the Dow average to climb 11 percent and reach 15,000 by Christmas.

To contact the reporters on this story: Daniel Hauck in New York at dhauck1@bloomberg.net; Michael Tsang in New York at mtsang1@bloomberg.net.

Last Updated: May 28, 2007 19:11 EDT