Janet Yellen and the Federal Reserve are back as the center of attention in the summer heat, as investors are trying to decide whether or not the monetary tightening cycle is for real. While Mario Draghi gave a huge boost to yields globally just three weeks ago, Mrs. Yellen and economic trends pushed the market in the opposite direction last week. The Fed Chair voiced her concerns about growth and inflation in her two-day long testimony, while Friday’s retail sales and CPI reports gave another warning sign concerning the consumer segment. The two disappointing reports seemingly helped the market, which could mean that the “bad news is good news” times are back, and the Fed will go from offense to defense very quickly.

As the Gorilla expected, the persistent weakness in wage growth continued to drag down both inflation and consumer spending, with the latter declining alarmingly once again, especially looking at the core retail sales reading. Consumer sentiment also ticked lower, delivering another blow to the dollar that has been trending lower even as yields rallied in the past three weeks. The “softness” in the data is far from being recessionary, for now, but an outside shock, like a Chinese hard landing, would find the economy in a vulnerable state now. With the Fed trying to gain some leg room with its rate hikes and its announced “quantitative tightening,” the bond market might be in for a rollercoaster ride in the coming months.

Technicals improved significantly thanks to the broad-based rally, as all of the major indices are in a perfectly bullish position once again. The Dow, the Nasdaq, and the S&P 500 are each above their short- and long-term moving averages, and only the Nasdaq missed out on a new all-time high last week. The Dow and the S&P closed at record levels on Friday, and the encouraging performance was backed by a reasonable showing from small caps as well. The Russell 2000 stayed a hair below its all-time high, but it still gained nearly 2% during the week. The Volatility Index (VIX) crashed as the market recovered from the recent correction, and the dovish words of Mrs. Yellen pushed the VIX back to single digits, close to the fresh multi-decade low from June.

Market internals also healed considerably, with only a few measures suggesting caution after the healthy rally. The Advance/Decline is back on track to lead the market higher. It is at new bull market highs, with advancing issues outnumbering declining stocks last week by a 5-to-1 ratio on the NYSE and by a 6-to-1 ratio on the Nasdaq. The average number of new 52-week highs bounced back strongly on both exchanges, jumping to 129 on the NYSE, and 97 on the Nasdaq. The number of new lows was little changed despite the rally, falling to 26 on the NYSE, but rising to 42 on the Nasdaq. The ratio of stocks above their 200-day moving average finally showed improvement, as small caps pushed the measure above the 66% level for the first time in almost two months.

The short bearish period ended abruptly for shorts, as they got burned yet again, especially in the second half of the week. Interestingly the most shorted stocks even outperformed the broader market, following the dovish turn by Fed. The energy segment showed decent gains, as the price of oil rallied, and RPC (RES) was among the best performers, with a weekly gain of 12%. The short interest in the company still stands at 56%, and Avis (CAR) is not far behind, with 43%, after another 10% jump in the price of the shares last week. Transdigm (TDG) surged higher on the list with the highest days-to-cover (DTC) ratio, hitting a reading of 13, as the stock rallied to a new all-time high, crushing the hopes of bears. Western Union (WU) might be getting ready for a sustained bullish move, as the stock jumped off its recent lows after a grueling decline, while the DTC ratio is at a two-month high at 13.

The stock market will be mostly left alone to digest the recent economic and monetary developments, as there will be only a few new releases coming out this week. Investors will get more input regarding the housing market on Wednesday, as the number of building permits and housing starts will be published, with the Philly Fed index coming out on Thursday. While the current challenging news cycle for the POTUS regarding Russia and his son wasn’t enough to spook the markets, the Gorilla still sees the biggest looming risk in the political sphere. North Korea’s recent missile test will likely spark a strong response from the leadership, and that could be a “black swan” event this summer. That said, given the improvements in technicals and market internals, the road looks to be paved for new highs after the recent correction. Stay tuned for another promising week!