NEW YORK (Reuters) - A massive rally in U.S. stocks since March has reawakened bullish spirits, but insiders are jumping out of the market in a sign the run up is getting stretched.

Company executives are selling stock at a rate not seen in two years after a near 50 percent rise in the S&P 500 from a March 9 low. That suggests directors and managers may think stock prices are nearing the top end of their range in the current economic climate.

There has been a decline in short interest -- borrowed shares sold but not yet repurchased -- which some analysts see as a warning. Some investors sell short to profit from price declines, and some say the recent rally has been supported by the reversing of short positions.

For brokerage Jefferies & Co., a significant increase in insider selling transactions as well as a decrease in short interest across most sectors of the S&P 500 demonstrates the weathering of the bear market rally.

Short interest fell in mid-July and firms with insider selling activity outnumber those with buying activity two to one, according to research firm InsiderScore.com.

“Both of those (factors) lends to our general thesis” that the equity market rally is running on borrowed time, said Patrick Neal, head of U.S. equity strategy at Jefferies & Co.

INSIDE MOVES

Since early March investors have piled back into the stock market in the hope of an economic recovery, bank sector stabilization and expectations many more will follow them.

But there are doubts the run-up is warranted amid signs of a difficult economic recovery.

Increased insider selling has in the past been an indicator of an inflection point for equity markets, said Ben Silverman, director of research at InsiderScore.com.

Sales of stock by company insiders suggests managers have a dim view of the market’s prospects.

According to InsiderScore, buying peaked this year around the market low in early March. For the week ended March 3, six days before the market sank to a 12-year low, insider bullishness as reflected in buying activity recorded its fourth-highest reading ever.

“Insiders historically have a strong correlation on a macro level to buying and selling, said Silverman, who is based in Princeton, New Jersey. “There’s a lot of negative signs right now coming from insiders.”

Jefferies said the selling has taken place in the consumer staples, information technology, materials and energy, and utilities sectors, with Neal pointing to a “huge” acceleration in some economically sensitive areas such as energy.

SHORT-COVERING FIZZLES OUT?

In the second half of July, short positions held by investors fell 10.3 percent on the New York Stock Exchange and 5.1 percent on the Nasdaq, according to the exchanges.

Investors who sell securities short seek to profit from bets the shares will fall. Short-sellers borrow the shares and then sell them in the hope of buying back the shares at a lower price, pocketing the difference.

The decline in short interest arguably removes a component of what has built the run-up in stocks. Fewer short positions means less potential short covering.

“A decrease in short interest takes away one element of support for the market,” said Neal, who expects the market to pull back after the first week of September.

However, analysts have questioned how much a role short covering has had in the current rally.

“It’s a reasonable point if you’re seeing a 25 to 30 percent drop (in short positions),” said Eric Newman, a portfolio manager at TFS Capital in West Chester, Pennsylvania. “Then, you don’t have that kind of fuel later on to push the market up, but I don’t think this is a significant enough move to warrant that.”

Newman said much of that 10 percent fall in short positions on the New York Stock Exchange was due to a huge drop in bets on Citigroup C.N, which saw a 72 percent decline in short positions on its stock in the second half of July.

Without Citigroup, short positions would have dipped less than 5 percent.

Short interest on the NYSE is still higher now than it was at the beginning of the year, suggesting that a rally that runs on the back of bearish players forced to cover positions is still possible.