The second week of the year proved to be as, or even more bullish than the first one for stocks, despite the sideways price action in the market up until Wednesday. The last two sessions of the period gave bulls a huge confidence boost, as all of the major indices surged to new all-time highs thanks to a broad and healthy rally. Although the Gorilla thinks that the current pace of the advance is unsustainable, and an orderly correction might be just around the corner, the strength of the 9-year old bull market is impressive. According to experts, how stocks perform in January often indicates how they will end the year; i.e., if stocks are higher in January, they end the year higher. This is referred to as the January Effect.

Things are a little bit less rosy regarding the economy, as the most important releases of the previous week were mixed, and some forward-looking indicators were slightly worrisome. The miss in the Purchasing Price Index underlines the recent dip in the key PMIs, while the sizable jump in weekly jobless claims is also something to monitor in the coming weeks. On the positive side, the retail sales report was decent, despite the negative surprise in the headline number, as the more significant core measure was better-than-expected. The CPI index also pointed to healthy trends in the consumer segment, and given the weight of the sector in the economy, it bodes well for GDP growth in the first quarter.

The technical picture is as good as it gets, as the late-week advance carried the key benchmarks way above the most watched moving averages, which signals a strong uptrend in equities. On a cautionary note, the indices look somewhat stretched, and a consolidation wouldn’t surprise the Gorilla. The Dow, the S&P 500, and the Nasdaq are all above both their 50- and 200-day moving averages, and now the Russell 2000 is also well clear of the indicators, thanks to the strong week for small caps. Interestingly, the Volatility Index (VIX) started to diverge from the major indices, as it finished the bullish period higher, rising back above 10, even as higher prices are usually associated with lower volatility.

Market internals remained healthy across the board, although some short-term weakness was apparent amid the lofty gains in the major indices. The Advance/Decline line failed to fully confirm the late-week strength, as it finished only a tad higher even as advancing issues outnumbered declining stocks by a 4-to-1 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs continued to rise on both exchanges, climbing to 278 on the NYSE, and 284 on the Nasdaq. The number of new lows also increased on both exchanges, rising to 40 on the NYSE, and 27 on the Nasdaq. The ratio of stocks above their 200-day moving average still failed to hit 70%, despite the broad rally, and it remains the only real red flag for the Gorilla.

Short interest ticked slightly higher from the record lows of late, as bears placed their bets for the New Year after a tragic 2017. Dillards (DDS) turned parabolic last week, gaining more than 20%, and with the short interest still at 44%, the advance could reach much higher. Wayfair (W) hit new all-time highs yet again, causing severe pain for a lot of bears, as short interest stands at 48%. TransDigm (TDG) started off the year in a stellar fashion too, surging to record highs together with the broader market, and since the stock is in second place on the list with the highest days-to-cover (DTC) ratios, with a reading of 16, a short squeeze is possible.

Traders are in for a quiet week regarding economic releases, as only Thursday is promising to be a busy session, with building permits and the Philly Fed Index scheduled to be released. Industrial production is scheduled for Wednesday, while the prelim U of M Consumer Sentiment Index will conclude the week on Friday. As technicals point to a possible consolidation phase, the Gorilla thinks that equities might trade in a narrow range this week. That said, as the dollar and bonds have been making waves, investors won’t be bored for a minute, while geopolitics is still the main source of risk. Stay tuned!