There are times during all the chart watching that I do when I see trading patterns that look like someone is accumulating shares in a way that might suggest an acquisition is on the way. Usually it turns out that I am wrong and nothing ever materializes. It’s a fun pursuit but not worth speculating about. As I have previously written, betting on merger and acquisition activity is not something that I recommend. And as you can see from the current signals in Hedgefolios (DOWN on APC, KMG, WGR and 80% of the sector), I was caught offguard by this move.

If nothing else, this is proof that I have no inside info here. Then again, if I had magically changed all the signals to UP last week, that would not be proof of inside info. Regardless, I have no such information. And since I am on that topic, I doubt that Pequot had any inside info when they placed trades on GE and Heller. I am confident that a thorough investigation will get all the facts, but based upon the limited data that is out so far, their trading activities seem inconsistent with prior knowledge of a transaction. Being long and short an M&A pair is great but it is not evidence of inside info. For experts like Pequot who are long and short just about everything on any given day, there are many fundamental and technical reasons why they would have placed those trades. Regarding the allegation that John Mack’s friendship with Pequot management is evidence of trading on inside information - that is scary. If it is now illegal to have friends in business, most of us are guilty.

Today, we are once again heading down this path of bidding up an entire sector based upon one M&A transaction (APC / KMG / WGR) and then hearing endless analyst commentaries on who is a likely target for future deals. I agree that the energy sector selloff has resulted in several underpricings of stocks relative to asset values and the huge premiums of today’s deals support that theory. However, I am amazed that the majority of investors were selling these stocks since the beginning of May and all the way through yesterday. This must be one of the great exceptions to the Efficient Market Hypothesis because the market (and me) were mostly negative about this sector until one market participant (APC) decided to tell all the rest of us that our fundamental and technical analysis was so wrong. Unless more deals get announced to validate this speculative effort, I expect yesterday’s outlook and pricing will come back into play.

As a final note of caution, if you have a business friend that recommends you buy one of the names that are being speculated as the next great energy sector acquisition target, you might be investigated for inside information!!