Stocks continued to trade sideways before Friday’s session last week, as economic numbers were mixed and worries about the European banking system continued to weigh heavily on financials and the broader market. Despite these woes, the major indices finished the week on a very positive note, as the non-farm payrolls release beat expectations yet again with a headline number of 255,000. Analysts were expecting a reading of 180,000, but the labor market still seems to be resilient and businesses keep on adding a healthy number of jobs. The surprisingly strong uptick in average earnings also points to continued growth, contrary to the recent GDP release, which showed a significant slowdown in the last quarter.

Traders still seem to ignore the negative international environment, even though the cracks in the European banking system continue to resemble the early days of the 2008-2009 financial crisis. Banking giants like Deutsche Bank (DB) and Credit Suisse (CS) are trading below their crisis lows, and the negative trend in global interest rates will likely continue to cripple the profitability of financial companies. The Bank of England and the Royal Bank of Australia both cut their benchmark rates to new all-time lows, and with more than half of the outstanding government debt already trading at negative rates globally, credit markets will probably remain in “unchartered territory” for the foreseeable future.

The technical picture is still promising, as the recent correction did not cause real damage to the underlying bullish trend. The major indices held up well above their “break-out” levels, while the Nasdaq and the Russell 2000 provided strong leadership for the rally. The Dow, the S&P 500 and the Nasdaq are each above both the rising 50-day and 200-day moving averages, with the Dow clearly being the weakest among the benchmarks. Small caps outperformed large caps last week, and the Gorilla considers that an encouraging sign for the coming weeks. The Volatility Index (VIX), fell to another 52-week low on Friday, following the bullish jobs number, as it closed the week just above 11.

Market internals are still consistent with an ongoing bull market, and the recent consolidation might have paved the way for further improvements. The Advance/Decline line kept on hitting new highs last week, as advancing stocks outnumbered declining issues by a 4-to-1 ratio on the NYSE and by a 5-to-1 ratio on the Nasdaq. The number of new 52-week highs declined slightly, to 185 issues on the NYSE and 148 on the Nasdaq, while the number of new lows increased to 14 on the NYSE and 36 on the Nasdaq amid the correction. The ratio of stocks above their 200-day moving average bounced back last week, and the 73.5% reading registered on Friday is the highest since early 2013.

The broad short-covering trend continued for the fourth week in a row on Wall Street, as the short interest in the most shorted stocks on the NYSE and the Nasdaq declined sharply again. Wayfair (W) was among the few exceptions, as the short interest in the major e-commerce player rose to 44%, despite the more than 20% rally by the stock in the past two weeks. Online lender LendingTree (TREE) was one of the best performers of the list again, as the short-interest dropped to 44% from 47% last week with the stock being up by more than 50% since mid-June. Western Union (WU) still sits at the top of the list of stocks with the highest day-to-cover ratios (DTC), with a reading of 23. Varian Medical (VAR) is also causing headaches for shorts, as the DTC ratio increased to 16, while the stock rallied 20% in three weeks.

Traders might take a much-needed breather after a busy period, with only the retail sales and consumer confidence numbers being on the list of the scheduled key releases for his week. Both indicators will be published on Friday, so the last day of the week might be the most volatile yet again. Financial news might take the backseat for the next couple weeks, as sports usually dominate the headlines during the Olympic Games. That said, the Gorilla is still excited by the prospects of the current technical setup, and bulls might be in for a decent rally following the consolidation of the past two weeks. With the Nasdaq and the Russell 2000 now leading the way, the Gorilla hopes that the momentum will stay on the side of bulls in the coming weeks. Stay tuned!