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Pay close attention to this stock index ahead of Memorial Day

Brian Sozzi

This Memorial Day weekend, let a discussion of stocks accompany your ice cold beer on the beach. Because it’s getting ugly out there folks amid heightened trade war fears... especially the action in one key index.

Garnering little fanfare — but should be top of mind with investors — is the fresh breakdown in the Dow Transportation Average index (^DJT). The index broke through its important 100-day moving average on Thursday thanks to a broader selloff in the markets. The ISM manufacturing composite index for May hitting a three-year low, as reported Thursday, also didn’t help sentiment on the transports.

“While I remain hopeful that the goals of what we’re trying to accomplish with China can be had, the decision to lay tariffs all over the place in order to get there has threatened the global expansion,” said Peter Bookvar, chief investment officer at Bleakley Advisory Group, moments after the ISM reading hit the newswires.

To veteran strategist Matt Maley at Miller Tabak, if the Dow Transports stay below the 100-day moving average it would be “negative” for the sector. It would probably be negative for the stock market at large, too.

The Dow Transports are often used as a proxy on the health of the global economy. Fizzling momentum in the transports suggests market participants are losing confidence in the global economic outlook. Maley said the technical breakdown hasn’t reached panic level yet, but if the weakness persists it would be a red flag.

Right now, that waning confidence in the world economic outlook could be sourced from a host of angles all tied to the U.S.-China trade war.

For one, the Federal Reserve’s minutes from its latest meeting included new language of keeping interest rates low for “some time.” While investors are often never one to hate on low interest rates, the comments could be a sign the Fed is more worried about the global economy during this trade impasse than many believe.

“I don’t believe the China trade war is fully priced into the markets,” said Kristina Hooper, chief markets strategist at Invesco, on Yahoo Finance’s The First Trade.

Meanwhile, bellwether stocks such as Apple (AAPL), Caterpillar (CAT) and Deere (DE) have tanked in the past month. These major companies are caught smack in the middle of the heated trade rhetoric for a number of reasons. Namely, they rely on China to achieve their bottom line objectives.

“I have been very pessimistic from the start on the U.S. China trade situation — so my expectation is that we will continue in an acrimonious state for some time,” said Hooper. “China is not going to capitulate or make any significant trade concessions.”

Not everyone is concerned, however.

“We do think the overall market environment is positive,” said Ari Wald, chief technical strategist at Oppenheimer & Co. Wald said his portfolios are mostly skewed toward growth themes.

“The S&P 500 is only down 4% peak to trough, nothing too concerning just yet,” Wald said.

Do yourself a favor nonetheless this long weekend: Study the Dow Transport index.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi

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