NEW YORK (CNN/Money) - As the stock-market retreat continues, there are few signs of the bears going into hibernation, with the number of bets that the markets will fall hitting a record high in July.

After hitting a record in June, short interest on the New York Stock Exchange climbed 4.8 percent in the four weeks through July 15. There were 7.55 billion short positions in July, up from 7.20 billion in June, according to the Wall Street Journal.

To short, investors borrow shares, sell them at a lower price (when all goes according to plan), and receive the proceeds. Short sellers are betting the stock price will drop, so they can repay the loan with cheaper shares, enabling them to pocket the difference.

The record bearishness cuts two ways. Some think it represents a darkening cloud over the market, that will make it more difficult for stocks to post a sustained rally. Others see it as a sign that pessimism is nearing an apex and too many people are now short, just as too many were going long on the way up.

Eventually, the markets will stop falling and buyers will come out of hiding to push stock prices higher. But in the meantime, skeptics argue any rallies will be short-term ones, triggered by "short coverings."

Largest short positions on NYSE Company  Short interest  Change since June 14  Lucent Tech.  377,812,287  10,663,339  Nortel Networks  315,463,705  -15,263,002  Sprint-PCS  151,368,031  15,781,789  Kmart Corp.  91,807,298  -1,913,415  Xerox Corp.  83,226,099  6,330,492  Conseco Inc.  78,616,209  -31,863  AT&T Wireless  77,774,101  -1,153,622  Cendant Corp.  72,803,870  -749,643  Motorola Inc.  70,414,948  -9,793,942  Corning Inc.  63,460,363  5,220,716   Source: Wall Street Journal

Scared of potential rallies that would cause them to lose money, short sellers often rush to buy or "cover" their short positions. That buying pushes the market higher, forcing other shorts to also cover -- but the ensuing rally is not sustainable.

Short covering moves usually come in quick bursts, and could be confused with a market's rally off of its bottom, said Jim Hedges, president of LJH Global Investments, a Florida-based hedge fund.

"With every passing day, investors' confidence in the near-term market strength falls," said Hedges. "With that you see many 'fool's rallies' in the market that are more likely a function of the short interest coverings. As the markets continue to drop, we come ever closer to that glorious 'bottom,' and as such short coverings should accelerate as people try to make what [profits] they can before a snap back."

"You recognize [short covering] during periods of multiple 'fools rallies' which are periods where you have strong intraday snap-backs," he continued.

For a substantial number of short positions to be flushed out, investors need a reason to cover their positions, said Tony Dwyer, chief market strategist for Kirlin Securities.

"Either valuations become attractive [so investors take up long positions] or there is a huge price dislocation, such as the drop following Sept. 11," said Dywer.

The market's recent downward spiral may qualify for the huge price drop Dwyer mentioned, as the Dow hovers near its post Sept. 11 low and the Nasdaq languishes around five-year low.

Hedges added that most short sellers cover positions after a huge drop or a string of declines to avoid caught on a rebound, and this may add to the buying following a significant drop.

"Subsequent to a big event such as Sept. 11 or a string of negative days, there is overselling. When investors realize this, the market rebounds and short sellers will cover," he added.

Short sellers are mum when it comes to specific stocks they are shorting, but telecom stocks make up six out of the 10 most heavily shorted stocks on the New York Stock Exchange, according to the Wall Street Journal.

Largest short position changes on NYSE Company  Short interest  Change since June 14 AES Corp.  59,647,323  33,896,080  Elan Corp.  35,558,201  24,699,622  Mirant Corp.  25,002,071  19,716,310  Sprint-PCS  151,368,031  15,781,789  Agere Systems  25,154,389  14,167,571  Qwest Comm.  48,081,133  13,916,925  Lucent Tech.  377,812,287  10,663,339  Tyco Intl.  48,800,824  10,101,133  El Paso Corp.  20,566,964  9,408,920  Cablevision  26,604,011  9,177,875   Source: Wall Street Journal

AES Corp., Elan Corp. and Mirant Corp. top the list of companies with the largest short interest increases within the month, according to the paper.

While short interest balloons on the exchanges, some investors may see the building negative sentiment as a sign that the markets are nearing a bottom and might be on the way up.

"The higher short interest goes, the more eventual buyers there will be," said Paul Cherney, chief market strategist with Standard & Poor's. "It represents buying potential, because the shorts can't book profits without buying. These short-covering rallies take about one-and-a-half trading sessions, but they can't be seen as an overly bullish sign."

Kirlin's Dywer said investors have become more cautious with regarding rising short interest as a sign of buying potential.

"People paid attention to that in the past, but it's happened too many times when it didn't work," he said. "People will pay attention, but less so than before."

As far as short interest nearing a bottom, Hedges said it happens when fundamentals outweigh lower stock prices. "The problem, though, is that point is not easy to recognize."