Short covering appears to be doing the heavy lifting in today's market rally

This bounce in equities is pleasant, yet I hate to be the one to put a damper on it: once you look at what is fueling it, something looks off.

Several of today's top advancers have been this year's worst performers. That points to short covering as the main force behind the rally, rather than a fresh reassessment of AI or the turn in bond yields.

Nike is up 6.5% and Lululemon has climbed 6.3%, putting both among the day's leaders. They are also two of the year's biggest laggards. Intuit and Expedia are posting strong gains as well.

Some clues suggest falling yields are playing a role: housing-linked names are strong, with Pool Corp up 8% and Zillow up 10.2%. XHB, the home-builders ETF, has added 2.9%. It may be tempting to apply that explanation to the entire move, but I would hesitate. The continued drop in yields reinforces that view, as it could mean cash is moving into Treasuries rather than equities.

Such counter-trend action can occur when funds reduce exposure and the shorts they hold are in less liquid names.

Rumors have surfaced that the VARA AI fund has blown up, potentially triggering a wider de-risking wave. Some say the fund, managed by Ben Hoskin and David Field, oversees $40 billion in assets, which would make the fallout meaningful. The post-Leopold script may be playing out once more. After the earlier heavy selling in AI shares was traced to Situational Awareness blowing up, buyers came back in force. That sort of news can signal that forced selling is no longer a threat.

Either way, I find it hard to connect all of this to fundamentals. Inflation came in hot once more today, and oil is up another 3%, which makes the bid in bonds look odd. Short-covering can explain why stocks are holding up, but a possible fund blow-up could be distorting the whole picture, and I am trying to account for that.