The post-Jobs Friday vacation week turned out much more volatile than anyone expected, as the lingering risk that the North Korean nuclear program posed intensified. Tensions rose after a series of reports, which point to some much-feared upgrades in the country’s missile force. The “under the hood” weakness that the Gorilla noted in the stock market previously reinforced the political trigger, as small caps continued to lead the market lower throughout the decline. What’s more, inflation missed the consensus estimate for the fifth (!) month in a row, and it is harder and harder to ignore that something is fishy in the consumer segment. With all the negatives in mind, the 2% decline in the major indices is not that scary, and the bull market has plenty of time to prove its resiliency again.

Rate hike odds declined materially after the already mentioned CPI report on Friday, and a possibly dovish Fed could be an important narrative in the coming period. Year-over-year inflation is now only running at 1.4%, well below the Federal Reserve’s 2% target, and although the Central Bank continues to treat the weakness as transitory, retail sales and other “hard” economic numbers have also been notoriously soft lately. Job openings, on the other hand, provided a sigh of relief earlier on last week, but the PPI index came in a mile below expected, underlying the problems with overall demand. Non-farm productivity and labor costs also showed weakness and yields suffered a meaningful blow, as Treasuries were in high demand.

Technicals were hit hard by Thursday’s slump, as the S&P 500 and the Nasdaq both slipped below their 50-day moving averages, while staying well above their 200-day moving averages. The Dow remained above both its short- and long-term indicators thanks to its previous amazing run, which saw nine consecutive all-time closing highs in the mega cap index. Small caps are lagging the broader market, and severely so, as the Russell not only stayed below its 50-day moving average, but it found support just above its long-term indicator. The Volatility Index (VIX) skyrocketed from single digits to 17; the highest level since November, as investors rushed to buy protection against a more significant downturn.

Market internals continued to deteriorate throughout the week, and some of the measures are now at multi-month lows, although the major benchmarks are still not far from their all-time highs. The Advance/Decline line took a nosedive, as declining stocks outnumbered advancing stocks by a 4-to-1 ratio on the NYSE and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs continued to drop sharply on both exchanges, falling to 75 on the NYSE, and 70 on the Nasdaq. The number of new lows is trending higher, and it overtook the number new highs this week, rising to 94 on the NYSE, and 97 on the Nasdaq. The ratio of stocks above their 200-day moving average fell off a cliff, as small caps weighed heavily on the measure, and it fell to 57%, from 64%, just a week ago.

Short interest took off from the historic lows observed in recent weeks, but it is far from the long-term average and remains consistent with an ongoing bull market. Avis (CAR) was among the notable outperformers during the correction, as the stock rose by 5% last week, and with a short interest of 44%, bears could continue to suffer. Trade Desk (TTD) has also been holding up well amid the broad decline, and the short interest of 63% could be encouraging for the coming weeks. Iron Mountain (URM) is still showing the signs of a short squeeze, as the days-to-cover (DTS) ratio for the stock is currently at 17, and the company is up by 15% in the past month. Garmin (GRMN) is back on the podium of the list with the highest DTS ratios, with a reading of 15, and the stock was virtually unchanged amid the correction.

Tuesday’s retail sales report will provide the next clue about the health of the consumer economy after the CPI release, and given the recent trend, the Gorilla wouldn’t be surprised to see another negative surprise. Wednesday will be the busiest day regarding economic numbers, with building permits, housing starts and the FOMC meeting minutes all coming out, while the Philly Fed Index will be out on Thursday. Although foreign politics stole the show from the President’s domestic worries, investors will still pay close attention to the ongoing investigation in the Russia case. Bulls will be looking for signs of healing in technicals as the correction unfolds, and the underlying long-term trend combined with the proximity of the all-time highs are providing a solid base for hope. Stay tuned!