February is Setting Up to be a Huge Test for the Stock Market and for Washington

It looked as though the government shutdown would be averted. The Senate approved a stopgap funding bill last Wednesday that would have provided the necessary funding to keep the government running through February 8.

That ship has sailed, we are in a shut down.

This scenario has played out many times in the past where Congress passes short-term funding bills to avoid a government shutdown. A shutdown during the holidays and at a time when the stock market is dropping so sharply may have dealt a serious blow to what is left of investor confidence.

There is another deadline looming for the end of February. The tariff ceasefire between the U.S. and China was set for 90 days when it was announced in early December. That means the ceasefire will end at the end of February unless there is some progress made in the trade negotiations.

If the tensions between the two countries wasn’t bad enough already, on Thursday the U.S. Department of Justice filed an indictment against two Chinese nationals.

The U.S. accused two Chinese nationals of coordinating with state security officials on a decade-long campaign against dozens of companies in the U.S. and abroad to steal intellectual property and other data, adding tensions to a relationship already fraught over trade. Zhu Hua and Zhang Shilong are accused of conducting a hacking campaign against U.S. companies and government agencies. The announcement also accused the two of coordinating with state security officials.

The protection of intellectual property is one of the main contentions in the trade war. The U.S., in addition to unfair tariffs being applied, has major issues with how China conducts business with foreign companies. The claims are that China allows its companies to take technology developed by others and then build copycat technology without protecting the intellectual property. It goes deeper than that, but I don’t want that to be the focus of this article.

I have compared the current market environment with the beginning of the bear market in 2007-2008 on several occasions. The S&P dropped below its 104-week (representing two years) moving average in early 2008 and then it moved sideways for most of the first quarter. The index then bounced from March to May before it hit the resistance of its 52-week moving average.

The S&P has dropped below its 104-week moving average this week and the 10-week RSI is approaching oversold territory. The weekly stochastic readings are already in oversold territory. The current chart is looking very much like the chart above.

If the similarities continue, we could see the market get a little bounce in the next few weeks and then move sideways in the second half of January. This would take us in to February and the looming deadlines on funding and trade.

Personally I think we may see a bounce in the next few weeks. The indices would encounter resistance from the moving averages. In January 2008, a two-week bounce was halted by the 104-week moving average. The index then turned lower and we entered the grind that I mentioned earlier.

With the deadlines looming and the market falling so sharply, it looks like 2019 will start with lots of drama. Hopefully you have made adjustments to your portfolio already and are in a position where you are protected against the market falling farther.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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