One of Wall Street's hottest trades could soon cool off

Airline stocks may encounter turbulence after they helped boost the Dow transports to an all-time high, according to one strategist.

Airline stocks have soared in the past month, boosted by the postelection rally in equities and the revelation that Warren Buffett's Berkshire Hathaway holds stakes in some of the sector's biggest names. Industry giants United and American Airlines are now up 23 and 11 percent respectively, while even previously struggling names like Delta and JetBlue have seen bluer skies since the election.

But not everyone is on board for the rally in airlines. Max Wolff, market strategist at 55 Capital, is among the doubters. "There's literally headline risk here, and your portfolio decision could crash if you have just one name," he said Wednesday on CNBC's "Power Lunch."

Wolff said one key factor in the airline rally is energy prices, which have been fairly low this year, allowing airlines to expand their profit margins with lower fuel costs. But since energy prices tend to fluctuate, any price spike is a threat to airlines, Wolff told CNBC by email. That, along with more capacity control, has allowed airlines to keep up strong profits, though Wolff believes investors still don't have the legroom to play with individual airline stocks.

"We think they'll still have some pricing power for a while, but again individual stock picking, it's late in the game for that at this point," Wolff said.

On the other hand, Rich Ross, technician at Evercore ISI, says that from a technical standpoint airlines have nowhere to go but up. Ross points out that not only do charts of the NYSE Arca Airline index show a "bullish ascending triangle," but that the index has broken out of a two year "rounded base of support."


"This is a group that is just taking off, and I would not be afraid to be a buyer of the airlines," said Ross.

Airlines are now up over 27 percent year to date, with Wednesday's leg up taking the Dow transports index to its highest level since 2002.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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