Just when it looked like the major indices had recovered from their “North Korea” lows last week, another steep decline rocked Wall Street on Thursday, with small caps being at the forefront of the correction. This time, the increasing worries about the new administration’s policy plans triggered the drop and were intensified by the tragic attacks in Barcelona and the mixed reception of the FOMC meeting minutes. As central-bank-related-news had an even stronger effect on markets than usual before this week’s Jackson Hole symposium, the uncertainty regarding the Fed’s future steps weighed on investor sentiment in the second half of the week.

Economic numbers finally provided mostly positive surprises, especially the much-anticipated retail sales report. After the fifth consecutive miss in the CPI Index, analysts feared another dismal showing from the consumer segment. However, sales beat the consensus estimate by a healthy margin, causing a rally in stocks and Treasury yields alike. The bond market changed direction with equities after the bounce, as it seems that one data point wasn’t enough to calm growth worries. The Philly Fed Index and the U of M Consumer Sentiment Index were also better-than-expected, but the housing market cooled down hopes of a quick recovery, as both housing starts and building permits came in well below estimates.

The technical picture reflects the ongoing correction, as the major benchmarks all dipped below crucial levels, while some of the key indicators are also signaling trouble. The Dow, the Nasdaq, and the S&P 500 closed the week below their 50-day moving averages while staying well above their 200-day indicators, with the long-term trend still clearly being positive. The Russell 2000 continued to disappoint, as the index dropped below its 200-day moving average, leading the market lower, as the relative weakness in small caps continues to be apparent. The Volatility Index (VIX) mirrored the North Korea spike on Thursday as well, and although the VIX finished below the weekly high once again, the 15 reading is still the highest since May.

Market internals continued to deteriorate amid the broad weakness, but some of the most reliable measures refused to follow the market lower, providing an early bullish signal. The Advance/Decline line, for example, is showing a slight positive divergence, although 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 continued to fall on both exchanges, dropping to 56 on the NYSE, and 47 on the Nasdaq. The number of new lows was also worrisome, rising to 116 on the NYSE, and 98 on the Nasdaq. The ratio of stocks above their 200-day moving average continued to show weakness, dropping below 55%; the lowest level since October.

Short interest has been drifting higher recently, as several big investment firms started to issue warnings about the stock market, despite the strong underlying bullish trend, possibly leading to some nice opportunities soon. The most shorted stocks were under pressure last week, but recent high flier Avis (CAR) is still looking good, with a short interest of 42%. Hertz (HTZ) is in a similar position as its competitor, with a good track record in the past few months and a very high short interest of 39%. C.H. Robinson (CHRW) is near the top of the list with the highest days-to-cover (DTC) ratio with a reading of 12, and the stock showed relative strength during the recent volatile period. V.F. Corp (VFC) also sports a double-digit DTC ratio, while the stock is trading near its 52-week high after a bullish year so far.

With the economic calendar empty this week, everything points to a busy and volatile period on Wall Street. The number of new home sales will be published on Wednesday, with the durable goods report coming out on Friday, but all eyes will be on Jackson Hole and the Fed. Bond markets signal a dovish change in the Fed’s policies and a dominantly hawkish meeting could cause turmoil in Treasuries and equities as well. The departure of Donald Trump’s controversial chief strategist Steve Bannon could open a new chapter in the President’s ongoing power struggle. The Gorilla will keep track of the recent technical weakness in stocks as well. The bull market proved itself numerous times this year, and if the early positive signs turn into strength, bulls could be in for a great week, despite the worries. Stay tuned for an exciting week!