INVESTING: Outlook bright long term, but look out for potholes

Bull markets can take many forms, depending on the investor’s perspective. Terms like secular and cyclical get thrown around, along with more obscure references to Kondratief Waves and Fibonacci sequences. I know day traders who think a bull market lasts only two hours. Then there’s Warren Buffett, who still has a few positions he bought in 1974.

I remember cruising around Indianapolis eight years ago looking for a home so my family could move from Florida and seeing gas at 95 cents a gallon. I looked at my wife and said, “That’s the cheapest you are ever going to see gas in your life.” But I didn’t do anything about it. Of course, oil bottomed in the next 12 months, and it has been more or less moving higher since. The question for today is, does it keep going?

A secular market is a move that lasts many years, possibly decades. The bull market in equities from 1982 until 2000 was clearly a secular move. The downtrend in interest rates from 1981 until-well, it may still be going on-is another example. Cyclical moves are often shorter in duration and counter in nature to the larger secular move. The 1987 stock market crash is an example of a cyclical bear within a larger secular bull market.

It’s beginning to look more and more as if the bull market in energy is a secular move. Last year was a year off in the more powerful uptrend. The price of oil is up only slightly for 2007, but it looks like a breakout is under way. Energy-related stocks once again have been leading the market, and that’s saying a lot considering the power of the recent move. The gains have been good, but they could get a lot better.

The peak oil theorists have been saying for a few years that the world is pumping as much oil on a daily basis as we will ever be able to pump. This doesn’t mean new fields won’t be discovered or new methods won’t lead to better yields at existing sites. It simply means we won’t be able to pump more than 80 million barrels a day, no matter what happens. If you listen to the language of OPEC, I tend to believe the theory. OPEC says it won’t pump more, but at $65 a barrel that’s insane. It would pump more if it could, but the days of turning on a few more spigots are gone, forever.

Take a look at a chart of OIH, which is an exchange-traded fund of oil services companies. After hitting a high of almost $170 a year ago, the index finally exceeded that level this week. This is a volatile sector and I wouldn’t be surprised to see some downside action soon, but the possible weakness is short-term in nature. I will be adding to my energy positions on any pullback.

The general stock market looks fraught with short-term risk, but the intermediate and longer-term upside potential is quite strong. I would stay away from smallercap stocks and concentrate on the bigger names in utilities, energy, consumer noncyclical and health care. It also would be a good idea to keep a little extra cash lying around, as the market is due for a period of consolidation/correction. But as I’ve been saying since October, be ready to buy the dip.