Volatility returned in earnest to Wall Street following the quiet days of the holiday, as traders re-entered the market after taking a step back before Christmas. The past few years saw some painful losses during the first week of January, and some investors feared a similar start after the strong late-year rally in stocks. The Gorilla paid close attention to the major trends of the first few trading sessions, as those might give important clues regarding the next several months. According to that, bulls could be in for an encouraging year since, the major indices all finished with gains, and the Nasdaq finally showed relative strength after a lengthy negative period.

Economic numbers were a slightly less bullish than they had been of late, but the overall picture remained positive, with the more forward-looking indicators showing much welcome strength. The non-farm payrolls number was the most awaited release of the week, but the indicator didn’t provide too much to talk about this time. The headline number slightly missed expectations, but the positive revisions, together with the strong growth in hourly earnings, triggered a positive reaction on Wall Street. The ISM manufacturing and non-manufacturing PMIs both posted great readings, although factory orders declined by a bit more than expected in December.

Technicals improved thanks to the rally in the second half of the period, despite the slightly worrisome underperformance of small caps. The Dow, the S&P 500 and the Nasdaq all finished the week back above their 50-day moving averages, following the modest correction toward the end of December. All three of the benchmarks now sit well above their rising 200-day moving averages. The Nasdaq led the broader market higher, registering hefty gains throughout the week. The Russell 2000 finished below its short-term average, despite the slight weekly gain, as small caps were the weakest segment of the market. The Volatility Index (VIX) fell back to its recent lows on Friday, while stocks recovered from the correction, closing the week at the historically low 11.50 level.

Market internals improved significantly following a mixed period, as the strength of the Nasdaq helped the most important measures in erasing the prior negative divergences. The Advance/Decline hit new highs amid the broad-based rally, 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 average number of new 52-week highs jumped higher on both exchanges, rising to 145 on the NYSE and 102 on the Nasdaq. The number of new lows continued to decline sharply, falling to 8 on the NYSE and 22 on the Nasdaq. The ratio of stocks above their 200-day moving average shot higher, confirming the bullish price action, finishing the week on a two-month high at 68%.

The list of the most shorted stocks on the NYSE and the Nasdaq reflected the positive market trends, as the short covering continued in most segments. As an exception, the short interest in oil services company RPC (RES) rose to 51%, despite the 10% rally in January, as commodity-related issues had a strong week. The short interest in medical marijuana company INSYS (INSY) is now over the 80% level, even after the encouraging jump in the price of the stock since mid-December. Dow Chemicals (DOW) is a new name on the list of the stocks with the highest day-to-cover ratios (DTC) with a reading of 13, although the stock trades close to its all-time high. Verisign (VRSN) still holds first place on the list with a DTC ratio of 19, after a 5% rise in the stock last week.

The Gorilla thinks that volatile trading might continue this week, as institutional investors continue to rebalance their portfolios after the start of the new year. The economic calendar is short on crucial releases following a very busy week. The speech of Fed chair Janet Yellen might cause some fireworks on Thursday, but Friday’s session will bring the most awaited releases once again. The retail sales report, the PPI index, and the UOM consumer sentiment index will all come out on the last day of the week. With the seasonality still being slightly bearish, the Gorilla hopes that stocks continue defying the odds and pleasing bulls. Stay tuned for another exciting week!