Bulls have to be delighted with how this summer is playing out so far, as the stock market emerged from another scary-looking correction in the face of the negative seasonality. While it seemed that the “sell in May and go away” rule would apply this year, the major indices have defied gravity and have continued one of the longest bull markets ever. The Gorilla is delighted to see the resilience that the market showed to bad news yet again, although this week lacked bearish catalysts, except for a few negative earnings surprises. Mario Draghi and the European Central Bank made headlines on Thursday, as the President of the bank tried to talk the Euro down without any success. In fact, the Dollar hit a new 2-year low against the common currency.

The Dollar’s decline, and in part the rally in stocks, was fueled by the dip in Treasury yields, as investors continued to scale back their bets on the future rate hikes by the Federal Reserve. With only a few significant economic releases coming out during the week, overseas news had a bigger role than usual, as a string of positive Chinese surprises kick-started the week on Monday. The powerhouse of growth continues to fuel the global rally, while domestic stocks got a boost from the better-than-expected building permits and housing starts on Wednesday. New jobless claims also ticked lower, and although the Philly Fed Index disappointed, the overall picture was still encouraging.

Technicals are still in the all-clear zone, as even the previously lagging small caps joined the rally and hit a new all-time high, while only the Dow failed to shine during the week. The Nasdaq and the S&P 500 all reached uncharted territory, with the tech index retaining the leadership role that it lost with the flash crash in June. All benchmarks are above both their 50- and 200-day moving averages, and the distance to the indicators widened significantly last week. The Russell 2000 is also in a bullish position, even after an expended period of sideways price action. The Volatility Index (VIX) touched its multi-decade lows from June on Friday. While it finished slightly off that level, it was still under 10 after the negative session.

Market internals were helped by the strength in small caps, and even the previously suspicious indicators got back to levels that are consistent with a healthy bull market. The Advance/Decline line is one of the best-looking measures, as it relentlessly pushed higher all week with advancing issues outnumbering declining stocks by a 4-to-1 ratio on the NYSE and by a 6-to-1 ratio on the Nasdaq. The average number of new 52-week highs continued to rise on both exchanges, jumping to 184 on the NYSE, and 169 on the Nasdaq. The number of new lows declined in the meantime, falling to 14 on the NYSE, and 34 on the Nasdaq. The ratio of stocks above their 200-day moving average also improved significantly, as the small cap rally boosted the indicator again, pushing it to 69% on Friday.

As equities marched on throughout the week, it is no surprise that even more bears fled the battlefield wounded, as short interest slid to yet another historic low. Applied Optoelectronics (AAOI) has already rallied more than 50% this month, and there are more bears to fuel the rally, given its short interest of 57%. Seritage Properties (SRG) is also in the midst of a short squeeze, with more than 15% of gains in the past 10 days, and with an extremely high short interest of 56%. Hanesbrands (HBI) showed up on the list with the highest days-to-cover (DTC) ratio of 12, while the stock hit a 5-month high, possibly starting a major move higher. Realty Income (O) rallied strongly, helped by the positive housing market data, and with the DTC ratio still at 11, shorts might have a very tricky period ahead of themselves.

This week will likely be much more volatile than the recent one, and not just because of the heating up of earnings season. The economic calendar will be much busier, with the CB Consumer Confidence Index coming out on Tuesday, durable goods orders on Thursday, and the advance GDP reading scheduled for Friday. On top of all of those numbers, the FOMC will also have a meeting on Wednesday. While Fed watchers expect no rate hike or significant announcements this time around, the recent dip in the Dollar might provide a chance for the Fed to move to a more hawkish position without spooking the market. The Gorilla is satisfied with the recent strength of the market and hopes that the summer rally will prove sustainable, despite the negative seasonality. Stay tuned for an interesting week!