TUR ETF: Wait For A Pullback (Technical Analysis)

Introduction

What a roller coaster of a year it has been for Turkey. From the Lira falling to the lowest level in its history, an inflation rate surging to a nerve-racking 85.5% to the unemployment rate falling to a 4-year low and the Turkish government overseeing a widening budget surplus, 2022 has not been short of market-moving developments for the country.

That said, all this did not come in the way of the nation’s equity markets recording notable price gains, with Turkey’s stock market index, the Borsa Istanbul 100 Index, reaching a fresh record high of TRY 5515 this month. But is this the right time to hop on the Turkey index train? I think whilst there is a strong bullish trend, the incremental risk is too high for the incremental reward. Hence, I am waiting for a pullback for the next buying opportunity on the Turkey’s stock market.

If this is your first time reading a Hunting Alpha article using Technical Analysis, you may want to read this post, which explains how and why I read the charts the way I do, utilizing principles of Flow, Location and Trap.

Turkey Has Surprised Us

The iShares MSCI Turkey ETF (NASDAQ:TUR) tracks the MSCI Turkey IMI 25/50 Index stock market index for Turkey. The index is designed to measure the performance of the large-cap, mid-cap, and small-cap stocks in the Turkish equity market.

Read of Relative Money Flow

An upward movement on the relative chart of TUR/SPX500 means TUR is outperforming the S&P 500 (SPY). Conversely, a downward movement means the TUR is underperforming the S&P 500.

I anticipate a volatile reaction around the imminent resistance, halting buyers’ progress. Over the past 5 months, buyers have made impressive headway to form a bullish trend and sentiment. Yet, I believe they are likely to do a double-take at the immediate resistance level ahead. The reaction to this resistance location will determine the dynamics to follow with the TUR vs. SPX500 pair.

Notably, the monthly support is far away. This could have damning consequences for the TUR vs. SPX500 pair, making the risk-to-reward on this less attractive. All these things considered, I’m adopting the hold stance on TUR, despite bullish structure. In any case, I am yet to see any signs of a trap or false breakout to the downside to trigger the buys. My motto in trading is:

No trap? No trade!

Read of Absolute Money Flow

TUR has been making clear bullish moves after a prolonged accumulation period since 2019. The price is soon nearing a critical monthly resistance at $40.50. Similar to the relative chart of TUR/S&P500, there is no evidence of sellers being trapped. Thus, the buys are off the table despite the strong trend upwards.

I think the price could correct towards the nearest monthly support at $31.82, which can act as a momentum-building checkpoint for buyers to take on the monthly resistance. If we do see a pullback to buy at $31.82 and take it up to $40.50, that translates to an opportunity for a 26% gain.

TUR ETF Composition

Unsurprisingly, Turkey’s stock market is weighted towards traditional economy stocks; industrials, materials and financials, which make up 65.3% of the overall index.

Noteworthily, Turkey’s stock market represents a very cyclical slice of its economy. 56.1% of the exposure is towards highly cyclical sectors; industrials, materials, energy and real estate.

Looking at the top 5 holdings, there is broad representation across many sectors:

A unique feature about the top 5 stocks in TUR is the roughly equal-weighted nature of its composition. This improves the utility of having a TUR ETF. If for example, there was extremely high concentration towards a couple of stocks, as was the case in the UAE (UAE) ETF, then some investors may prefer to get exposure through direct ownership as the broad diversification benefits of an ETF would be weaker.

Key Fundamental Drivers for the TUR ETF

A pickup in Turkey’s Manufacturing PMI may make TUR more attractive from a fundamentals perspective. Since mid-2021, this metric has been on a steady descent down. In 2022, it has dipped below and sustained below 50 territory, indicating economic contraction. The weak economic outlook comes as a result of various factors, including a dent in domestic demand caused by pessimistic consumer sentiment, a rapidly declining lira, and ballooning inflation:

Another factor to keep a watchful eye on is the upcoming general elections in Turkey. The Turkish presidential election, which is scheduled for June 18, 2023, is a key catalyst that can prompt bullish sentiments on TUR and TUR/S&P500. The volatility that would ensue from this event ripens the chances of a trap structure forming via something like a false breakout to the downside. This is something I will look out for as it would trigger bullish signals according to my framework.

Summary

Overall, I think whilst TUR and the TUR/S&P 500 pair is exhibiting a notable bullish trend in recent months, the risk is higher at this juncture; there is low margin of safety. Hence, I am adopting the hold stance on the one as I await a pullback. Meanwhile on the fundamentals front, I will be watching the country’s PMIs and seeing how the election cycle unfolds.