When You Start Hearing Voices, Filter Out The Bad Ones

It was after the markets closed on March 8 when SVB Financial (parent of Silicon Valley Bank) released the news - it planned to raise around $1.75 billion of capital through a common share and preferred stock offering. Oh, and by the way, it also announced it sold $21 billion of its "available for sale securities" at a loss of $1.8 billion.

About four hours later, Moody's downgraded SVB Financial's unsecured debt to Baa1 from A3 and lowered its governance rating of the company. The press release from Moody's was critical of management's taking on too much risk and Moody's detailed financial challenges facing the company.

The next day, March 9, before the markets opened, two prominent Wall Street banks (Wells Fargo and JP Morgan) maintained their overweight ratings on SVB Financial's stock although they trimmed their price targets - one to $270 a share and the other to $300 share. An hour after the markets opened, SVB Financial's stock had lost $100 and was trading at $167.

But before all of this, something was going on with the Financial Select Sector SPDR (XLF) - an ETF that broadly tracks financials. It began to slip on March 7. Inside Excalibur Pro, we have tools that help monitor momentum, one of which uses the Markov Process. Markov creates two states and relies on past activity as well as current activity - with an emphasis on rolling returns and rolling volatility. At the end of March 7, Markov sent a signal with the states crossing - a full trading day before the disastrous news from SVB.

When states cross, it can often mean price movement follows. From the close on March 7 through the close on March 14, the financial sector ETF fell 8%. (It is also worth noting that SVB was owned by the ETF but it was a holding of less than 1% of the total portfolio.)