Red on the Med (TUR)

We’ve commented extensively on the downright ugly nature of the communist Chinese Regime and the brutal nature of its treatment of dissenters and other non-conforming ideological deviates.  Official prison time is among the best of options for those accused of questioning or otherwise attempting to undermine the holy state apparatus.  Unofficial prison time is among the worst.

 

We won’t get into what goes on in those hellish isolated encampments; those interested can Google the topic to learn what sickness prevails in the minds of those who are unwilling to brook disagreement with the extent of their political power.

 

That said, we’ve also commented on the ruthlessly effective way the Chinese state has engineered its markets to move in a bullish direction via those same tools of intimidation, incarceration, disappearance and torture.

 

Since last summer’s market waste, the Shanghai Exchange has been cajoled and extorted via mandated positive news stories and promotional propaganda over state news outlets (and the concurrent suppression of the dissenting blogosphere) to new eight month highs, passing several important technical markers on the way and paving the road toward socialist utopia as she goes.

 

Here’s a look at Shanghai stocks for the last year by way of the iShares China Large Cap ETF (NYSE:FXI)–

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There are a number of important features to discuss here, and they go like this –

 

  • First up, FXI posted a sub-20, deeply oversold RSI read back in January of this year (red circle), and true to that indicator’s reliability, the Chinese market has been ascending ever since.
  • Apart from the month of May, both RSI and MACD indicators have been trending above their respective waterlines in solid bullish fashion, a sign of more good news to come (in green).
  • Price action, too, has been constructive, rising above a seven month line of resistance at FXI $35 over the last two weeks (black line).
  • Price has also climbed in successive waves above three of her four salient moving averages, the last being overtaken in just the last two trading sessions (blue circle).
  • And finally, a reverse head and shoulders pattern (in red) has been forged over the last year whose upside count reaches above FXI $47!

 

All told, the Chinese market paints a picture of stable gains, even if those gains have come as result of a bullwhip and a barking dog.

 

Dogs and Turkeys

 

The Chinese market is representative of the broader BRICs group as well as many other smaller emerging market nations.  India and Russia, for example have moved strongly since New Year’s, and the Brazilian market – despite a government wracked by scandal, a domestic crime wave that has crippled travel through urban areas of the country, and an Olympic games that have only served to highlight that nation’s maladies – is yet on the rise.  And not just marginally; since the first of January the Brazilian Bovespa is up just a hair less than 100%.

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But it’s to a smaller emerging market that we turn our attention today.

 

Turkey’s leader Recep Erdogan has been consolidating his power base since the day he took office and just recently was afforded (or created, according to some) a fresh opportunity to continue on his path toward creating his very own Communist China on the shores of the Mediterranean.

 

A coup, it was said, and to his credit, the man left no stone unturned.

 

In what’s ostensibly understood to be a democracy, Erdogan has dis-employed tens of thousands of government bureaucrats, university professors, school teachers, media operators, police officers, judges, and military officials since the alleged coup early last week was discovered and subsequently suppressed.  Sixty children were also recently arrested for the crime of dressing in military gear!

 

But it’s the media closures that have worried western Turkey watchers.  A total of three news agencies, 16 television channels, 45 newspapers, 15 magazines and 29 publishers have been ordered shut down for their ties to ‘anti-Erdogan elements’.

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That said, it’s unclear whether Turkey will be as successful as China in simultaneously smothering dissent and promoting investment in its own domestic market.

 

But they’re going to try.

 

Just yesterday, Mao Erdogan arrested the head of research and chief investment strategist of Turkey’s second largest bank and brokerage, Ak Investment.  Criminal charges were filed against the gentleman for writing a less than savory analysis of the Turkish market in light of recent events.

 

Mert Ulker has had his financial analyst license revoked for violating “articles 299 and 301 of the penal code, which make insulting Turkey’s president, the nation or its institutions a crime.”

 

The bankin g authority issued a statement saying “that it disapproved of the publication of “reports that would turn expectations and the atmosphere negative.”

 

The Crime of Thinking

 

The most important question for us is whether the market gives a damn about some foreign analyst, his writings, the Turkish coup (feigned or real), Erdogan’s quest for absolute control of his country or anything else that smells of old style tyranny, communist or otherwise.

 

A look at the charts tells us they don’t.

 

This is the iShares MSCI Turkey ETF (NYSE:TUR) for the last year –

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Our read of the chart is as follows –

 

  1. In the first place, the massive volume over the last two weeks was a direct result of the coup story (red square).
  2. It was volume that resulted in a steep selloff and subsequent V-shaped buying spree, though, to be sure, the jury’s still out on where price will end up in the near term. It appears to be climbing, but no one knows for certain.
  3. That said, TUR has also traced out a year-long reverse head and shoulders pattern, like many of its emerging markets brothers, with a dramatic upside count that would bring it to nearly $58 on a successful completion of the formation. That amounts to a gain of 57% from these levels should it occur.

 

So we buy?

 

We believe the Turkey story can’t get worse.  If folks are buying and prices are rising after all the nonsense we’ve witnessed recently, then the bottom’s in and the elevator’s going up.

 

Still, we’re going to hedge our call, because the danger to Turkish shares remains over the near term.

 

So, in addition to buying a November synthetic long position, we’re buying a near term PUT on TUR, the details of which look like this –

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Many happy returns,

 

Matt McAbby

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