Although last week started out on a very positive note, with a broad rally that carried the major indices up by almost 2% on Monday, what followed was nothing short of brutal. The Dow and the S&P 500 lost 6% in 3 days, and even though there was a significant bounce on Friday, a re-test of the correction lows remains a possibility here. Jerome Powell’s first testimony was the main reason behind the decline, as the new Fed Chairs’ words were interpreted as hawkish, pushing rate hike odds and the dollar higher. Later on, Mr. Powell softened his stance, but in the meantime, Donald Trump announced his plan to impose trade tariffs on steel and aluminum. The POTUS’s protectionist push delivered another blow to stocks, as investors are now afraid of a full-on trade war with China and other key partners.

Economic numbers were mixed, with a slightly bearish overall picture, as the most awaited durable goods orders came in much worse-than-expected. The Chicago PMI printed below forecast too, while the so far resilient housing market also gave negative signals. New home sales and pending home sales both missed the consensus estimate by a longshot, as rising interest rates are starting to hurt this segment. As for the positive surprises, the CB Consumer Confidence Index rose significantly, the ISM manufacturing PMI also came in higher-than-expected, and the number of new jobless claims dipped even lower, with the indicator staying close to its decade-long low near 200,000.

The technical picture deteriorated somewhat as the major indices finished the week lower, but the bullish long-term trend is not in danger by any means. The relative strength of the Nasdaq remained clear, as the tech benchmark surged back above its 50-day moving average that it violated amid the sell-off, while the Dow and the S&P 500 both finished below their short-term indicator. Small caps also provided bulls something to cheer about on Friday, outperforming the broader market by a hefty margin. The Russell 2000 is just below its short-term average, despite a rather long period of relative weakness, while still being above its long-term average, similar to the other benchmarks. The Volatility Index (VIX) shot higher during the week, spiking as high as 26, but it finished under 20 yet again thanks to the rally on Friday.

Market internals reflect the negative price action, even following the encouraging showing by small caps toward the end of the week. This points to a possible drop to the February low. The Advance/Decline line closely followed the major indices, with no notable divergences, as declining issues outnumbered advancing stocks by a 3-to-2 ratio on the NYSE and by a 4-to-3 ratio on the Nasdaq. The average number of new 52-week highs was virtually unchanged on both exchanges, edging lower to 51 on the NYSE, and 75 on the Nasdaq. The number of new lows rose significantly, jumping to 107 on the NYSE, and 71 on the Nasdaq. The percentage of stocks above their 200-day moving average continued to decline, staying just above the 50% level; still signaling weak participation in the bull market.

Short interest remained very stable amid the hectic price movements, as those bears who are still short after the recent strong bounce held on to their positions. Dillard’s (DDS) had a blowout week, surging by more than 20% after releasing its quarterly numbers, and a lot of bears must be suffering, given its short interest of 46%. Microchip Technology (MCHP) also added almost 10%, despite the decline in the major indices, and with a days-to-cover (DTC) ratio of 12, the rally could continue. Extra Space Co. (EXR) showed strength amid the turmoil too, edging only slightly lower following a strong February, and since the stock is sporting a DTC ratio of 13, March could be another great month for bulls.

The first full week of March will be highlighted by the government jobs report being released on Friday as usual, while the other crucial economic release, the ISM non-manufacturing PMI will be published on Monday. Several Fed members will give speeches from Monday to Wednesday too, and given the rate decision later on this month and the recent trends in yields, investors will pay close attention to every word. As volatility remains much higher than in recent months, the Gorilla expects continued volatility, while technical levels will still likely play an important role. Friday’s advance was a very positive sign for bulls, and the strength in small caps could mean that a sustained bounce is underway. Stay tuned for another crucial week!