One beaten-up corner of the market is laying the groundwork for a major comeback.
The Dow Jones Transportation Index added nearly 1% on Wednesday after falling more than 3% in the past week. The group logged more than double the losses seen on the broader S&P 500. Transports have also trailed the S&P 500 this year, gaining 15% versus 24% for the benchmark index.
"There's no question this group has been lagging this year," Matt Maley, equity strategist at Miller Tabak, said on CNBC's "Trading Nation" on Wednesday, noting that the 11,000 level on the Dow Jones Transportation Index is one to watch.
"The thing is if we break out of that, that still won't take us to new all-time highs. That's still 8% from where we're trading right now," Maley said. "There's no question we're going to need this group to see new highs if the market's going to see a nice rally in 2020 like it usually does an election year."
Maley says one major railroad stock could help carry the group back to highs — Union Pacific.
"Here's a stock that's at the $180 level. That's going to be the key level to watch. It's bumped up against that level three different times. Each time it's come back. If it can finally break above that level in any kind of meaningful way, it's going to be very bullish for [Union Pacific], and for the rail group overall," Maley said. "In turn, that would be good for the entire transportation sector so I'm looking at UNP, Union Pacific, very closely right now kind of as a catalyst."
Michael Bapis, managing partner of Vios Advisors at Rockefeller Capital Management, says it pays to be selective in transports rather than blanket buying.
"We think there's a dichotomy in the space. I mean you have some of these transport companies that are feeling the Amazon effect like FedEx, like UPS and how all of that shakes out, but then you have the airline companies who are in consolidation, are going to further consolidate and they're a beneficiary of a growing economy and then you have a company like Union Pacific that's just done great," Bapis said during the same segment.
That split in the group is clear. While stocks like JetBlue, Kansas City Southern and Kirby are less than 5% from 52-week highs, names such as FedEx and American Airlines are more than 30% from their own.
"It's a stock picker sector," Bapis said. "I think it comes down to earnings. It comes down to growth in the holiday season and sustaining the margins for the first and second quarter of next year."