The long-awaited energy correction is now at hand.

This does not change the long-term story for energy: There is still a secular bull market in the group that has several more years left to run. In fact, the quick, sharp selloff in most energy-related stocks over the past few days is nothing unusual. Every great bull market in history had its periodic pullbacks.

I’ve been warning of this possibility since the beginning of September, most particularly in the September 14 issue of The Energy Strategist, (The Sell-off Consensus) and in a September 23 Flash Alert. This is also why I recommended selling Noble Drilling about a month ago. The good news is this move will ultimately offer us an opportunity to get into some great stocks at more attractive prices, but the buying opportunity could still be some weeks away.

The last correction in energy stocks was in the spring. Broadly speaking, the group saw downside of roughly 15 to 20 percent and the pullback lasted about two-and-a-half months. I expect this move to be of approximately the same severity.

Fundamentally, the autumn represents a lull period in energy demand between the summer driving season and the winter heating season. It’s not surprising that the last correction in energy stocks coincided with the lull between the end of winter heating demand and before the onset of the summer driving season.

Moreover, the recent spike in gasoline prices has prompted some “demand destruction”–some consumers appear to be conserving gasoline. In the past, however, demand tended to bounce back sharply as soon as gasoline prices contracted slightly.

Finally, managers who have been in the energy sector for the past six months have seen some huge gains. Some funds are likely selling some of these names to book gains on their trades–profit-taking.

How To Play It

The best way to protect your portfolio is to adhere strictly to our recommended stop-loss orders. These are updated in the Portfolio tables. And as I’ve explained in recent issues, I’ve been raising these stops consistently to lock in gains, particularly in some of our fastest-rising recommendations.

In the next issue of The Energy Strategist, I’ll once again review all Portfolio recommendations. We’ll probably make some changes to the stop recommendations to further protect gains.

For those willing to play options, I outlined a specific options strategy in a special report included in your September 14 issue, The Options Hedge. This put insurance strategy can be used to lock in gains on your better-performing stocks and insure you against pullbacks. Better still, it won’t diminish the potential upside from your holdings a great deal. I recommend again that all subscribers review that article. If you did take that recommendation, those options are now greatly softening the blow of any decline. I’ll continue to offer updates on the specific strategies I outlined in the three stocks mentioned in that article.

For now, we have been stopped out of four Wildcatter Portfolio holdings, all for nice gains. The list includes Marathon Oil (NYSE: MRO) for a 42 percent gain, Global SantaFe (NYSE: GSF) for a 25 percent gain, Schlumberger (NYSE: SLB) for a 16 percent gain and Weatherford (NYSE: WFT) for a 20 percent gain.

Two of these stocks–Marathon and Weatherford–were names I highlighted as being most overextended and due for a pullback. These were also two of the stocks for which I recommended an options hedge in the September 14 issue. I still believe the fundamentals for both stocks are sound, but they’re big winners and could see still more very severe profit taking in the next few weeks. Stand aside from Marathon and Weatherford–they’ll now be tracked in How They Rate as holds.

Global SantaFe is a contract drilling stock and Schlumberger an oil services giant. The drillers and oil services names are two of the most leveraged groups in the energy patch and two groups that have logged significant gains in the past quarter or two. Global SantaFe and Schlumberger are still vulnerable; I’’ll continue to track them as holds in How They Rate but I recommend that all subscribers now stand aside from both stocks.

In contrast, Cameco (NYSE: CCJ) and the Master Limited Partnerships (MLPs)–Enterprise Product Partners (NYSE: EPD), Penn-Virginia Resources (NYSE: PVR), Teekay LNG (NYSE: TGP) and Natural Resource Partners (NYSE: NRP)–are holding up particularly well in light of the recent selloff in the energy patch. All of these names remain solid defensive holdings in this environment.

Trade Updates

As promised in the September 29 issue issue of The Energy Strategist (Energy Infrastructure), I also want to offer a brief update on my shorter-term trade recommendations over the past quarter. Portfolio recommendations will be reviewed in the October 12 issue. Overall, the recommended trades were up an average of 28.1 percent in the third quarter.

Here’s a rundown:

· Todco (NYSE: THE): All subscribers should now be totally out of this trade. I recommended taking partial profits in early August and selling the rest of the stock last week. The overall average gain was a little more than 50 percent.

· Uranium Resources (OTC: URIX): This highly speculative stock ended the third quarter up roughly 33 percent. There is little news but I see uranium stock as less vulnerable than oil and gas stocks to the recent pullback. The nuclear power option is now firmly back on the table in the US and Western Europe. Uranium Resources continues to rate a buy under 0.75 but only for strict speculators.

· UEX Corp. (Toronto: UEX): Canada-based uranium explorer UEX was up 36 percent in the third quarter. This company has announced one exploration success after another over the past two months. The company has found high-grade reserves at its Shea Creek project. It’s partnering with big companies like Cogema (owned by the French government) and Cameco to exploit these resources. In the Shea Creek project, UEX has a 12.25 percent interest with an option to earn as much as a 49 percent interest in the mine. If the mine’s promise holds, this could be a big payout.

· Burlington Northern SantaFe (NYSE: BNI): This stock was up a little under 10 percent from my mid-September recommendation through the end of the quarter and I see a great deal of additional upside. The railroad stocks have held up very well, even on days when the market has been down big. That suggests that the group’s positive fundamentals are outweighing any gloomy market sentiment. The news catalyst will be the full reopening of Burlington’s Powder River Basin rail network for moving coal. If this is a colder-than-expected winter as currently forecast, look for the stock to do particularly well.

· US Airways Group (NYSE: LCC): The stock was up about 11.4 percent from my September 23 recommendation through the end of the quarter. When recommended, the stock was trading under the symbol AWA and was named America West. Holders of AWA (class B) shares received 0.4125 shares in US Airways Group a few days later when America West completed its takeover of US Airways. The merged entity was renamed US Airways. I still see this airline as a great short-term play on falling oil prices–the stock has been running up nicely over the past few days.

· Tidewater (NYSE: TDW): I recommended this stock right at the end of the quarter–it was up slightly by quarter end then gave back most of its gains over the past few days. That said, Tidewater is actually performing better than most stocks in the energy patch and my view on this stock is unchanged.