July 7 (Bloomberg) -- Record bets against U.S. stocks may mean the market is on the verge of a rebound fueled by purchases of shares that were sold short, according to JPMorgan Chase & Co.

So-called short interest on the New York Stock Exchange has risen 55 percent this year to a record 3.6 percent of listed shares, JPMorgan Chief Equity Strategist Thomas J. Lee wrote in a report today. In a short sale, an investor sells borrowed shares in anticipation of being able to buy them back later, or ``cover,'' at a lower price.

Given the ``extreme levels'' of short interest, positive catalysts for the market ``could trigger a substantial short- covering rally,'' New York-based Lee wrote.

The Standard & Poor's 500 Index of large U.S. companies declined 14 percent this year, led by financial and telephone shares. Short-sellers have benefited from crude oil's 49 percent advance to more than $140 a barrel, falling home prices and resulting bank losses on mortgages, and ``wariness'' about second-quarter earnings following three straight quarters of profit declines, Lee wrote.

A record 36 percent of the companies in the S&P 500 have at least 5 percent of their shares sold short, the report said. Eighteen percent have more than 10 percent of their shares shorted.

``The record short interest suggests to us that being a bear is consensus,'' Lee wrote. ``It has not paid to be a contrarian lately, but we wonder how often is consensus right.''

The 55 percent jump in short interest since October exceeds all other gains since 2000, the report said. The six previous increases averaged 28 percent and lasted 11 months, Lee wrote. During those periods, the S&P 500 declined an average of 6 percent.

The benchmark U.S. stock index gained an average of 8 percent in the six periods since 2000 when short interest declined, according to the report. The typical rally to cover bets reduced short interest by 12 percent. A drop in current short interest by that amount would lower the figure by 2.4 billion shares, worth about $70 billion, Lee said.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

Last Updated: July 7, 2008 10:51 EDT