(Bloomberg News) The biggest Standard & Poor's 500 Index rally in more than five decades is forcing stock market bears to abandon short sales, cutting them to the lowest level since 2007 last month.

Shares borrowed and sold to profit from declines dropped four straight months and represented 3.3% of all stock in January, according to data compiled by NYSE Euronext. Pessimists are giving up after missing the 95% rally in the S&P 500 spurred by the fastest earnings growth since 1994. The monthly decrease comes as individuals added $17.6 billion to U.S. mutual funds this year after withdrawing money since April.

While short sales rose 2.8% in the two weeks ended February 15, January's low may foreshadow slower gains in equities as the pool of new investors shrinks, according to Doug Burtnick of Aberdeen, Scotland-based Aberdeen Asset Management Plc. To Laszlo Birinyi of Birinyi Associates Inc. in Westport, Conn., levels haven't fallen enough to reverse gains or stop equities from climbing as the economy expands.

"When everybody is leaning on the same side of the boat, then there's a risk things may go in the other direction," said Philadelphia-based Burtnick, the senior investment manager of a fund that seeks to profit from both rising and falling stocks at Aberdeen, which oversees about $287 billion. "The market's liquidity-driven tailwind has made people very careful on how they want to position themselves."

Building Bulls

There are about 12 times as many investors speculating on gains in U.S. shares as there are on declines, a three-year high, according to New York-based Data Explorers, which provides research on short sales and stock lending. The firm's long-short ratio for U.S. equities rose to 12.4 on February 1 from 6.5 in September 2008 when Lehman Brothers Holdings Inc. collapsed at the height of the financial crisis.

"The appetite to short has waned as the market has risen," said Will Duff Gordon, a senior researcher at Data Explorers. Individual companies and industries may be overvalued, "but with most companies in robust health it is not a target-rich environment," he said.

The S&P 500 slid 1.7% to 1,319.88 last week. Violence that left more than 1,000 people dead in Libya sent oil above $100 a barrel, spurring the S&P 500's first weekly loss in a month. The slump cut the U.S. equity benchmark's advance for 2011 to 5%, still the best start to a year since 1997.

Stocks Climb

Stocks rose today as oil retreated and billionaire investor Warren Buffett said he's looking to make acquisitions. The S&P 500 climbed 0.7% to 1,328.43 at 10:33 a.m. in New York.

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