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Higher Yields Produce Cheap Financials

Yields begin December cheaper than the five-day, five-week and five-month modified moving averages on all the maturities, which is a clear sign that the risk is toward higher yields into year-end.

Yields currently straddle key longer-term levels on the five-year through 30-year, and to begin a renewed trend toward higher yields the five-year needs a weekly close cheaper than 4.532% and the 10-year needs a weekly close cheaper than 4.577%.

The 30-year bond stands above its 50-day simple moving average (SMA) at 4.669, which is well above the 200-day SMA at 4.550. Both moving averages are rising in yield, and this configuration favors higher yields. The yield on the 30-year moved above the 200-day SMA at the end of September after being below it since August 2004, and it continues to rise in yield almost daily. The monthly chart profile for 30-year yields favors higher yields, with a close in December cheaper than the five-month modified moving average at 4.598.

Will the coupon curve invert?

The yields on the two-year, three-year and five-year are essentially the same. I will thus focus on the spread between the 10-year and the five-year as the next key slice of the curve. The 10-year minus five-year spread ended November at +7.5 basis points. I show monthly and quarterly supports at +1.8/+0.7, suggesting that this spread will not invert in December. If there is a weekly close wider than the five-week modified moving average at 11.0, that would be my clue to look for a bearish steepening, with the 10-year yield rising faster than the five-year yield.

Two Undervalued Financial Stocks

Fifth Third Bank (FITB) is the best-screened banking stock. Shares are rated a buy and are 29.7% undervalued, with fair value at $57.24. The weekly chart profile is positive with the five-week MMA at $39.95. My monthly and quarterly value levels are $39.08 and $38.33. A weekly close above my quarterly pivot at $40.63 would put the targets on my semiannual risky level at $48.05. The risky level is below fair value, but that underscores the steep undervaluation of the stock. Shares were recently trading at $40.30.

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