In May J.C. Penney Company, Inc. (NYSE:JCP) dropped its first quarter bombshell on a shocked Wall Street – a loss of $163 million and suspension of its dividend.

Things were not going right for the department store chain, and this was painfully brought to light when President Michael Francis abruptly left the company after only eight months on the job. “The sudden nature of the departure underscores, in our opinion, the big-time mistakes J.C. Penney Company, Inc. (NYSE:JCP) has made in articulating [its] new image,” said Brian Sozzi, an analyst at NBG Productions, at that time.

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By this time the stock was off by nearly 50% from its February levels.

Yesterday, the company announced another disastrous quarter with sales declining 21.7 percent, worse than expected. It suffered a net loss of $147 million and slashed guidance. The culprits for the performance were an unsuccessful change in pricing strategy, and its reduced marketing activity in the quarter.

But the activity on the stock today has been surprising to say the least. It opened at $24 with a sizable upside gap from yesterday’s close, and is currently trading up almost 6.33% at $23.50, with high volumes of over 31 million shares.

What’s cooking?

According to this report, CEO Ron Johnson probably talked up the company’s prospects at a company meeting for analysts, saying he has a vision to recreate JCP stores around the “town square” concept but embellished with a digital, paperless environment, creating a new class of department store in the process. Johnson maintained confidence in his vision and promised to stay the course to make the transformation to differentiate itself from rivals.

But another view has been put forward, and that may be profit booking by the bears. To get the picture on the magnitude of shorting on J.C. Penney Company, Inc. (NYSE:JCP), remember that while the stock has halved from its February top of $43.18, the shorts have nearly doubled since then. As at end-July, 56.1 million shares were shorted, which is about 26 percent of outstanding shares.

That sounds reasonable, given that the worst could currently be discounted in the stock in its beaten down state – an ideal time for the bears to sell on rumors and buy the news!

That is not to say that the possibility of a short squeeze can be totally ignored. The slightest hint of good news could send the bears scurrying for cover.