With the market rally showing no signs of cooling off, it has become quite risky to short stocks.#-ad_banner-#

Indeed, many hedge fund managers that tend to make a living from short selling have moved to the sidelines, waiting for the market to switch direction before loading up on shorts. It’s a wise move to preserve both your capital and your sanity.

Still, not all short sellers have abandoned ship, and some of them are making increasing bold bets. You may not want to follow their lead — just yet — but it’s instructive to see which stocks they are targeting. If you own or are thinking of buying one of these stocks, the rising short interest should give you pause.

Here are seven stocks (and funds) seeing big changes in short interest in the two week-period that ended June 28. (Actual data were released on July 10.)

1. Pfizer (NYSE: PFE )

The short interest in this drugmaker surged a hefty 53%, to 336 million shares, making it the most heavily shorted stock on the New York Stock Exchange. Roughly a month ago, I noted that virtually every major drug stocks have rallied sharply in the past year. But Pfizer was notably absent from the select few drugmakers that seemingly deserved such gains. At the end of the quarter, short sellers often anticipate an imminent shortfall or weak guidance, though a quick review of the analyst reports following Pfizer reveals no such warning signs. Instead, it may be a concern that rivals are advancing with a key drug that threatens one of Pfizer’s top sellers, or that one of Pfizer’s own drugs in development is poised to deliver weak clinical results.

2. Cliffs Natural Resources (NYSE: CLF )

I’ve been noticing this iron ore miner appear on a number of recent screens that I have run, as it sports a range of impressive value metrics after falling two-thirds from its 52-week high. Short sellers think this stock has further to fall, as the short interest spiked 13% in just two weeks to 54.8 million shares. That accounts for 36% of the trading float, which is one of the highest percentages of any stock in the S&P 500. The entire commodities complex is in a massive correction mode, and falling prices are leading to curtailed output. That will set the stage for an eventual upturn in commodities, but we’re not there yet, and these short sellers likely think we haven’t even hit bottom yet.

3. iShares FTSE China 25 Index ETF (NYSE: FXI )

Throughout the first half of 2013, the Chinese economy has shown signs of slowing.  Whether China’s troubles are in fact deepening has become one of the biggest concerns for global investors, which have already been fleeing any emerging markets that have considerable exposure to China. Short sellers, led by hedge fund manager Jim Chanos, appear to think China is on the cusp of a big economic downturn. The short interest in this exchange-traded fund (ETF) rose 13% sequentially, to 49 million shares, and is likely to rise further until the Chinese economic picture becomes clearer.

4. Utilities Select Sector SPDR (NYSE: XLU )

A number of electric utilities have seen a recent rise in their short interest, which is probably due to a recent spike in interest rates that is making the utilities’ dividend yields a bit less attractive. Short sellers are anticipating further rotation out of this group, boosting their short position in this ETF by 30% in just two weeks to 38.5 million shares.

5. Six Flags Entertainment (NYSE: SIX )

It’s been a hot and muggy summer in the eastern half of the U.S., which has led many people to stay inside and bask in the air conditioning rather than venture outside. Might that be impacting attendance at this amusement park operator? The short interest more than doubled in just two weeks to 6.4 million shares, which represents five days’ worth of trading volume. That makes this a “crowded short” and would lead to a short squeeze if Six Flags delivers decent quarterly results on July 18.

6. Intel (Nasdaq: INTC )

Short sellers likely think weak PC sales will lead this chipmaker to miss forecasts when second-quarter results are released July 17. The consensus forecast anticipates profits of 39 cents a share on sales of $12.9 billion, and those numbers have not moved in two months, despite further signs of PC weakness. If short sellers are right, and Intel misses the forecast, it could have negative ripple effects across the tech sector. Chip equipment makers, for example, are highly reliant on Intel, which remains the largest buyer of semiconductor capital equipment in the world. Intel’s short interest rose by 6 million shares (to a hefty 235 million) in the two weeks ended June 28.

7. NetApp (Nasdaq: NTAP )

This provider of data storage equipment is also in the crosshairs of short sellers. The short interest spiked 27% sequentially to 43 million shares, which represents 12% of the trading float and seven days’ worth of trading volume. This stock is near 52-week highs, thanks in part to the robust market rally, though signs are emerging that spending on data storage may cool in the second half. Lowered guidance may be the negative catalyst that short sellers are anticipating when quarterly results are released in mid-August.

Risks to Consider: As noted, it’s risky to invest on the short side right now as a rising tide is lifting all boats. So do a substantial amount of research on any stock that you do intend to target for a short sale.

Action to Take –> Tracking short interest activity right in front of an earnings season can be quite fruitful as we can learn fairly quickly if short sellers were on the mark. Also, if earnings season proves to be disappointing, you can look to these stocks and funds for trading ideas on the short side.

P.S. — With so much going on in the market, wouldn’t it be great to find stocks good enough to buy, forget about and hold “Forever?” My colleague Elliott Gue and his staff recently went looking for the absolute best stocks on the market. After six months and $1.3 milllion worth of research, the team was successful. To learn more about the “Forever” stocks they uncovered — including some names and ticker symbols — click here.