Salient to Investors:

The 20 stocks with the highest short sales in the S&P 500 rose an average of 5.1 percent in December versus 0.7 percent for the Index, the widest performance gap since January 2012. Equities tend to rally when companies with the most short interest outperform – like in March 2009 and January 2012.

Laszlo Birinyi predicts the 4-yr bull market will advance to its fourth and final stage by finally attracting individual investors driven by expansion in US housing, recovering markets in Europe.

Steve Shafer at Covenant Global Investors said we are in a risk-on mode, meaning short covering of the most-shorted stocks – a good sign because it means people expect this move to persist.

Tom Stringfellow at Frost Investment Advisors said short sellers provide only a temporary lift because abandoning their bets soaks up a pool of potential demand.

Jeffrey Saut at Raymond James said stocks are going to rise because the economic improvements are real, while many hedge funds were short on concerns over Europe, the fiscal cliff and political dysfunction, and we’re overcoming these issues.

Markit said the ratio of bullish to bearish investments in US equities has increased to 14.2 from a 2012 low of 11 in June.

Assets in equity mutual, ETFs and closed-end funds rose 85 percent since the bull market began in March 2009 through September versus the S&P 500 rise of 94 percent.

The International Strategy & Investment gauge of hedge-fund bullishness rose to 47.3 at the end of 2012 versus 43.9 a year ago and near the 1-yr high of 48.1 in August.

Henk Potts at Barclays has not only improved many of the economic data points but also increased consumer confidence and investors’ appetite to take on risk, and expects equities to be an outstanding class in 2012 (sic).

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