Last Wednesday the markets were comforted by Fed chairman Ben Bernanke’s comments that the US economy is in a nascent recovery that requires interest rates to be kept low. Banks are breathing a sigh of relief that the recent rise in the discount rate will not lead to a significant rate increase. Even the Fed will begin to tighten in the near future, and the yield curve remains very steep, meaning the difference between short and long term rates is very wide.

Yield-seeking investors have traditionally looked at big banks to boost income, which used to offer solid balance sheets with good cash cushions and nice dividend yields. The financials have recovered somewhat. However, after the recent meltdown, this sector still leaned heavily on government support in order to survive. It is unlikely to restore juicy dividends soon. In addition, banks have to be in capital preservation mode because new regulations might require them to hold higher levels of T1 capital ratio.

The biggest addition to the S&P 500 in terms of dollar value since the year 2000 took place last Friday, as Berkshire Hathaway B class shares (BRK.B) joined the index, weighing in at about 1.3% of the index total now.

Repercussions in the S&P Financials sector, proxied by XLF (SPDR Select Sector Financials), have BRK/B going from not even being a component of the ETF to a weighting of 8.44% literally overnight. Is this good, bad, or indifferent? It’s hard to say really, but one must note that since the rebalance was announced on January 26^th, BRK/B has rallied over 13% with the S&P 500 losing over 1% during the same time frame. (Note: Two rebalances in Citigroup (C) occurred in 2009 which drove the stock to the high $4 and eventually even $5 only to quickly retreat back to the $3's, as noted by Michael Johnston of ETF Database here).

The last week has seen 100-day moving averages torn apart, surprises from economic data reports and one of the most notable sell-offs for stocks in some time. Recently, many home gamers and pros alike have put financials out of their purview. The erratic and effectively risky nature of these names are less than inviting, but there are opportunities to profit from what has happened and what will happen next.