The major indices staged a strong rally the first three days of the week, but gave back some of their gains before the weekend, as the continued plunge in emerging market currencies triggered a global risk-off shift. After the Italian political drama, this time it was Brazil that caused headaches for investors, as the country’s currency fell by more than 15% in a matter of weeks, despite the Central Bank’s intervention. While there still hasn’t been meaningful contagion into developed markets, it’s clear that the global growth story is weakening, which could be an early warning sign for bulls. Despite the worries, the Gorilla is glad to note the resilience of the advancing trend, as the short-term dips are still eagerly bought by traders.

Economic releases were few and far between last week, in stark contrast with this week’s busy schedule, but the few reports that came out were encouraging. The ISM non-manufacturing PMI was the most awaited indicator, and it handily beat the consensus estimate, still showing rapid expansion in the services segment. Despite the lack of economic catalysts, bond markets were very active ahead of the Fed meeting, with the strengthening emerging market woes and the renewed trade war fears pushing yields lower in the second half of the week. The flattening of the yield curve continued, as investors still expect the Fed to tighten in the next couple of years, while being unsure about the longer-term outlook.

The technical picture is positive across the board, as the recent divergence between the major indices resolved in a bullish fashion, with the Dow and the S&P 500 joining the Nasdaq in the rally again. All three benchmarks are now well above both their 50- and 200-day moving averages, and the tech index achieved a new all-time high last week. Small caps never looked back after climbing to record levels two weeks ago and the Russell 2000 continues to clearly outperform the broader indices, being way above even its short-term moving average. The Volatility Index (VIX) fell to a 5-month low near 11 thanks to the improving sentiment and the bullish price action on Thursday, but closed the week above 13, as risky assets got volatile on Friday.

Market internals improved significantly thanks to the broad-based rally, and it is no question for the Gorilla that the foundation of the bull market is still solid. The Advance/Decline line surged to new highs yet again, as advancing stocks outnumbered declining issues by a 4-to-1 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs rose sharply for the second week in a row, jumping to 161 on the NYSE, and 252 on the Nasdaq. The number of new lows was virtually unchanged, edging lower to 48 on the NYSE, and 39 on the Nasdaq. The percentage of stocks above their 200-day moving average almost hit 60% during the week, but the measure fell back to 56% on Friday, as participation remains subpar.

The most shorted issues joined small caps as the second best performing segment of the market, as bears were looking for the exits before the key Fed rate decision following the strong rally. Fossil Group (FOSL) almost doubled since the beginning of May, adding more than 15% just last week, and since short interest still stands at 40%, there could be even more in the tank. Under Armour’s (UA) recovery continued in earnest last week. The stock is now up by more than 100% this year, and the exits are still narrow, given its days-to-cover (DTC) ratio of 11. Iron Mountain (IRM) has an even higher DTC ratio of 13, and since the stock recently climbed to a fresh 4-month high, the real takeoff might still be ahead for bulls.

It will be a tumultuous week with regard to economic releases, and with the Fed’s meeting thrown into the mix, traders are unlikely to be bored. The rate decision is scheduled for Wednesday, along with the PPI Index, and since there is no strong consensus concerning the rate hike, volatility will likely spike substantially higher. The key CPI Index will be released before the Fed on Tuesday, and given the Central Bank’s focus on inflation, it could change rate hike odds at the last moment. The end of the week will also be busy, as the retail sales report will be released on Thursday, while industrial production and the U of M Consumer Confidence Index are set to be released on Friday. While investors might get dizzy after this week’s expected rollercoaster ride, the Gorilla is confident that the recent rally in stocks is the start of the next leg in the bull market. Stay tuned!