The cracks continued to widen below the surface of the furious rally last week, as the major indices once again surged to new highs, but small caps lagged the broader market. Tuesday evening’s speech by Donald Trump to Congress defined trading, as the surprisingly conventional tone of the new POTUS sparked a strong rally on Wednesday. The Dow hit 21,000 less than a month after crossing 20,000 for the first time, as mega-cap stocks continued to lead the market higher. The Fed also made headlines, as several officials hinted on the necessity of a rate hike in the near future, causing a spike in Treasury yields and the dollar.

Economic numbers were mixed, but overall the more forward-looking indicators were in line with the “surprisingly strong growth” view that the Federal Reserve holds currently. The prelim GDP print and core durable orders missed expectations, but the ISM manufacturing and non-manufacturing PMIs, the Chicago PMI, and Consumer Confidence Index were all way better than expected. Mr. Trump, without going into details again, reiterated his plans to boost infrastructure spending, significantly cut taxes, and cut back on regulations. The Gorilla is curious to see if the current optimism regarding the economy will prevail in the coming weeks, or the predicted rate hike will lead to a correction in equities.

Technicals remained solid overall, despite the mixed price action and the slight deterioration in some of the key measures. The relative weakness of the Nasdaq and small caps remain the biggest concern here, but the major indices are still right at their all-time highs, confirming the bull market. The Dow and the S&P 500 remained above their 50- and 200-day moving averages, but the Nasdaq closed right at its short-term average. The Russell 2000 continued to underperform the broader market and finished below its flat 50-day moving average, although it’s still above its long-term indicator. The Volatility Index (VIX) spiked higher and hit 13 before Mr. Trump’s speech, but the “Fear-Index” dropped sharply in the second half of the week and finished near 11.50 once again.

Market internals remained slightly confusing for bulls, as negative divergences continue to cause some concerns regarding the sustainability of the short-term rally. The Advance/Decline line was almost flat, as advancing issues slightly outweighed declining 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 declined on both exchanges, falling to 161 on the NYSE, and 152 on the Nasdaq. The number of new lows ticked higher again, rising to 24 on the NYSE, and 40 on the Nasdaq. The ratio of stocks above their 200-day moving average alarmingly dipped below 70%, closing the week at 69%, signaling a possible correction.

Wednesday saw a historic short-squeeze on Wall Street, as lots of bears capitulated following the President’s speech, while the major indices continued their march into unchartered territory. Gogo (GOGO) had an eventful week, as the stock jumped by more than 20% following its earnings report, while short interest remained very high at 44%. Shorts in Pilgrim’s Pride (PPC) are also under pressure, with the stock being up by 15% this month and the short interest still standing at 42%. Meat producer Hormel Foods (HRL) popped up on the list of the stocks with the highest day-to-cover ratios (DTC), as the stock fell by 15% following the earnings report, while its DTC ratio jumped to 11. Business Software provider Iron Mountain (IRM) is also a new entrant on the list, with a DTC ratio of 10, despite the fact that the stock trades near its all-time high.

The Gorilla is pleased to see that earnings growth is back on track, even if the average annualized growth rate of 5% is still far from stellar. Two-thirds of the S&P 500 companies beat their estimated profit numbers in the previous quarter, as most sectors registered healthy growth in both earnings and revenues. On another positive note, Snap Inc. (SNAP) completed the largest IPO since 2014 last week, with an encouraging initial valuation, painting a positive picture of investor sentiment. Looking ahead, volatility might increase in the second half of the week, as the European Central Bank will hold its monetary meeting on Thursday, and the February employment report will be released on Friday, as usual. With that in mind, the Gorilla thinks that traders might be in for some fireworks this week, so keep your seatbelts fastened and stay tuned!