Most-shorted stocks outperform market during Tuesday’s bounce

Who knows why stocks picked Tuesday to surge. But one fact to consider is the immense bout of short selling that went on last week.

Hedge funds tracked by $Goldman Sachs (GS.US)$. doubled down on bearish wagers, with the dollar amount of short sales hitting the highest level since the 2008 financial crisis. Similar trends were on display at prime broker units of Morgan Stanley and $JPMorgan (JPM.US)$, where bearish positions increased among clients.

There are signs that short covering may be at work during Tuesday’s market bounce. As the S&P 500 climbed more than 2% as of 12 p.m. in New York, a Goldman basket of the most-shorted stocks surged by almost twice that.

“Managers increased micro and macro hedges amid the sharp market drawdown,” Goldman analysts including Vincent Lin wrote in a note. “With the sole exception of staples, all sectors saw increased shorting.”

Now, with the Fed embarking on the most aggressive tightening in monetary policy in decades, as much as $15 trillion has been erased from equity values so far in a boon for short sellers.