Thanks for the mesh - the fact that it is a rectangle and not a contour of the actual puppet is a good first indication of problems. A quick thing you can try is set “Mesh Type” from Auto to “Contour” (its one of the puppet properties - I am not at a computer just now). The yellow line should hug the outline of the character or else all the warping will go weird (like you are seeing). The yellow rectangle usually comes up because there are parts of the drawing not connected/overlapping with other parts. But Contour forces it to have a guess.
Also, putting Dragable and Fixed on the same handle is interesting. I have not tried that before. Fixed means “don’t move” and Dragger means “this is how you move me”, so not sure what adding both will do...
I had similar problems before. You need to take the dangles off the shoulders and fix them into place. Also dragging the hand Instead of the elbow is better in my experience.