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May 27th Morning Energy Report

Good morning. What’s seems like eons ago to traders, equities closed nicely, not hugely but nicely, higher on Friday with the Dow up 63 to 16,606, the S&P 500 adding 8 to 1,901 and the Nasdaq tacking on 31 to 4,186. By the way, that was a record high for the S&P. The thinly traded markets got a boost on the Commerce Department’s new home sales report showing sales rose 6.4% in April beating analysts’ expectations and hitting a 3 ½ year high. Being Friday is ancient history in trading terms let’s move on to this morning. And it is a very good morning. The Dow is up 64 and it’s doing it on its own because Asian markets closed mixed and the European markets are doing the same although the FTSE and DAX are up more than the CAC 40 is down. U.S. equities are getting a push on the announcement that Pilgrim’s Pride offered to buy Hillshire Brands Co. Remember, investors love M&A activity and it almost always gives a shot in the arm to equities. This week we’ll have a tsunami of economic news and I’ll keep you posted.

Natural gas closed up 4.6¢ on Friday at $4.405 with shorts covering some of their positions worrying about what the weather forecast might bring come today and knowing CDD’s are increasing as we get into summer. Well the weather forecast is below and the Midwest is warm for the next 5 days but temperatures are quite benign for the 6-15 day time frame. Traders are keying more on cash market this morning where there’s a little incremental buying in the Midwest from over the weekend. Natty is getting a little boost this morning trading up 16.2¢. We’re in “bid week” where buyers and sellers are talking to each other setting up their physical supplies for next month which paper traders are closely watching for price direction. Tomorrow the June Nymex contract expires and it will reflect some of those physical cash trades.

Oil traded up on Friday with WTI out gaining Brent. WTI closed up 61¢ at $104.35 while Brent added 18 to $110.54. Two separate circumstances pushed prices up. First, tensions continue in Ukraine and the status of exports of Libyan crude change day to day. Both are, as politicians say, “fluid.” Second, positive manufacturing reports on Thursday from both China and the U.S. and resulting implied increase in energy demand was supportive. This morning WTI is pulling back just a tad being down 11¢. Chatter.

You may be worried about the stock market and the “sell in May and go away” adage but investors in general are not. The CBOE Volatility Index (VIX), aka the “fear index,” closed Friday at 11.36, its lowest level since March 2013. That means investors see less risk ahead, particularly with the S&P setting record highs. Some analysts say a lack of volatility suggests complacency that could encourage excessive risk taking and that concern is shared by New York Fed Reserve Bank President William Dudley and Dallas Fed President Richard Fisher with their comments in recent days. The lower the VIX the more over bought the markets get leaving them vulnerable to set back. One of the reasons the VIX is so low is the market hasn’t moved much this year. The S&P is up just 2.8% and the broader Russell 2000 is off 7% from its record close in early March. Basically, after 5 months in 2014 the markets have been chopping around taking a breather after a spectacular 2013 although there has definitely been a rotation in the last couple of months from high growth to blue chips and conservative stocks as evidenced by the fact the Dow Jones Transportation Average hit an all-time high last Friday and the Nasdaq down about 4%. Have a good day.

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