NEW YORK, June 9 (Reuters) - Short interest on the Nasdaq and NYSE rose in late May, the exchanges said on Tuesday, suggesting bearish sentiment may be creeping back into the stock market after a three-month rally.
It was the first time short interest in the Nasdaq has increased since the middle of March, when investors bet that the then-budding rally would be short-lived. Since then, the Nasdaq has gained more than 46 percent from the 12-year lows, while the broad S&P 500 is up about 40 percent.
The latest reading also reflected the first time short interest in the S&P 500 increased since the end of March, when bets edged up just 0.1 percent.
"There's no doubt about it" that short sellers are betting the market is going to roll over, said Michael Pento, senior market strategist at Delta Global Advisors, in Middletown, New Jersey.
Short investors hope to profit from a decline in a stock by borrowing shares and selling them, with the expectation they will be able to buy them back at a lower price, pocketing the difference.
However, if the shares rise, investors may be forced to buy them back at a higher price. This phenomenon, called a "short squeeze," pushes the stock up even higher.
Stocks' recent surge has forced some investors to abandon their short positions to avoid increasing losses. Some analysts have cited this squeeze as exacerbating the market's run-up.
On the New York Stock Exchange, short interest rose 1 percent, while on the Nasdaq, it rose 3.6 percent, according to the data, released twice a month.
Pento said that from a contrarian point of view, the increase in short interest could push the market up further if investors get caught in another bout of optimism.
"If you get any kind of surprise that causes them to cover, it's rocket fuel for a recovery. When I'm sold short, that's pent-up buying pressure," he said.
As of May 29, short interest rose to about 15.29 billion shares on the NYSE, compared with 15.14 billion shares as of May 15. The short interest made up 4 percent of shares outstanding, up from 3.96 percent in the previous period.
On Nasdaq, short interest rose to about 6.61 billion shares, compared with 6.37 billion shares over the same time frame. The average number of days it would take to cover the outstanding short positions, or the index's short ratio, rose to 2.96 days from 2.41 days.
For a factbox on the biggest changes in Nasdaq short interest, please see.

(Editing by Dan Grebler) Keywords: MARKETS SHORTINTEREST/ (leah.schnurr@thomsonreuters.com; +1 646 223 6026; Reuters Messaging: leah.schnurr.reuters.com@reuters.net)

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