Short covering may be a major contributory factor to Tuesday's US stock market bounce, according to a report by Bloomberg.

Short covering may be a major contributory factor to Tuesday's US stock market bounce, according to a report by Bloomberg.

While the S&P 500 was up more than 2% at 12pm in New York, a Goldman basket of the most-shorted stocks climbed by almost twice that.

Last week, hedge funds tracked by Goldman Sachs Group Inc ramped up bearish bets, with the dollar amount of short sales reaching the highest level seen since the 2008 financial crisis. 

Prime broker units at Morgan Stanley and JPMorgan Chase & Co also saw similar trends, says the report.

Data compiled by Morgan Stanley shows that net leverage for long/short hedge funds, a measure of their risk appetite, dropped to its lowest level since April 2009. While such positioning data is widely used to judge whether equities are approaching a bottom, the reality is probably more nuanced.

The report cites David Rosenberg, chief economist and strategist at Rosenberg Research & Associates as saying: “Short covering gives equities a big boost. This move should be viewed in the context of an overall downtrend – meaning rallies can be rented but not owned.”