Tax season is here once again. While holding a concentrated stock position can pose unique challenges for providing liquidity, hedging and diversification, this year they may provide a key avenue for satisfying your tax obligation thanks to the multiple highs achieved by the S&P in 2014.
My focus would be to use some of the capital gains my concentrated stock position achieved to satisfy my tax obligation. There are a few ways that one can liquidate or diversify out of a concentrated position. For instance, you could use an exchange fund if you were primarily concerned with diversifying. A collar strategy is a viable way to hedge your current position if you are anticipating a pullback in the broad market. Many executives implement a 10b-5 trading plan to liquidate portions of their position over time automatically. While each of these options provide executives will means to reduce or protect their concentrated position, they are not that efficient in offsetting income taxes.
Utilizing a Variable Prepaid Forward (VPF) is a better option in my opinion for the executive who would like to cash in on the market rally of 2014 and use those proceeds to satisfy a current tax bill. The VPF allows the executive to sell their shares at a future date but receive cash today. The amount of shares sold in the future could be less (i.e. if the concentrated stock price continues to appreciate) or more (i.e. the price of the concentrated stock depreciates) than the value per share today. The key benefit to the executive is that because the shares will be sold in the future, no capital gains tax will be incurred today, allowing the executive to satisfy today’s taxes via a future sale of stock.
There are a variety of strategies for satisfying taxes and addressing the many concerns of holding concentrated positions. Contact me for some complimentary tips.
Trading is a financial sport. It is also one of the only ventures that one can embark upon that requires learning while doing. Failure is a part of trading if you define failure as being losing money, blowing up initial accounts, refunding accounts and sometimes blowing those up too, searching endlessly for the perfect approach, and fine tuning your trading plan. Oh, don’t forget the countless times you enter the market, have unrealized gains, and from nowhere the market reverses and stops you out. How about developing the ability to determine when changes in the market have made your strategy less competitive versus when you should scrap your entire strategy or when the market environment will shift back toward your initial strategy.
Traders, to be successful, must continue to develop, garnering wisdom from past experiences. Development doesn’t end one you’ve found your edge. It actually is really just beginning. All of the experiences you’ve encountered during your entrance into the financial markets should be visible in some way in your success in trading. Our failures are what propel us toward success.
One way of viewing this is from analysis paralysis. Most traders, myself included, immerse themselves in various indicators, theories, approaches, time frames, asset classes, etc. when beginning to trade later to only narrow the multiplicity of data down to a couple of consistent strategies. Trading early on, I feel, is more about ego and less about profitability. In the beginning, every trader will tell you that he or she is seeking to be profitable, which is their reasoning for over complicating the simple. Trading can be exciting and profitable, but rarely do the two exist at the same time. You know you’ve found your sweet spot when you’re able to focus and concentrate on the simple thing or things that allow you to be profitable, yet are able to recognize high probability opportunities from all the other knowledge you’ve amassed over time. This holistic collection of trading information is your trader toolbox. Once you’ve created it, though you may not open it daily, periodically it will come in handy. The development of your trader toolbox takes you from conscious competence to unconscious competence, or the ability to instinctively know what to do and or identify periodic opportunities external to your immediate strategy.
On Monday, CyberArk (CYBR) was downgraded by J.P. Morgan, who essentially said that the stock has gone too far too fast relative to its outlook. CYBR’s share price has doubled this month and now it may be time to take profits off the table. The entire sector fell on Monday on the heels of the downgrade, after posting significant gains on Friday as President Obama signed an executive order encouraging the sharing of cyber security threats. Also this month, the company posted better than expected numbers on the top and bottom line. Currently, the stock has a 9% short interest.
From a purely technical perspective, I believe CYBR will trade to the $52 level and then bounce in the interim to the $57area before breaking support and landing in the $48 range. It is in this $48 area that I believe buyers will begin scaling back in.
As of late, the Kiwi has been the weakest currency against the majors. The Kiwi rallied last year as it led the way for interest rate expectations. As we all know, the RBNZ is pretty straight forward about its intentions. The RBNZ, this week, raised its OCR by another 25bps to 3.5%. Yet, the Kiwi got hammered against currencies like the Aussie and CAD. This is most likely because the market had already priced in the rate hikes. Ergo, no surprise data, no continuation for the Kiwi.
In a prior post, I showed a short entry in the Kiwi vs the Loonie. I got short on last Tuesday at .94344 going into CAD event risk. Since, then the NZD/CAD has broken down (fell 247 pips from entry) but is now nearing another key support level. I attribute the move to the CAD CPI figures in conjunction with Aussie CPI, and better than expected PMI data out of China. The Aussie has been the strongest currency this week. It also strengthened 228 pips vs the Kiwi this week . This is followed by Euro which strengthened 221 pips, the Greenback which strengthened 167 pips, CAD which strengthened 154 pips, and the Yen strengthened 130 pips this week against the Kiwi. The Pound was the leader of the majors against the Kiwi and strengthen by 270 pips. It has since then traded slightly lower, but is still near the week’s highs. I would venture to say that the strength of the Aussie on CPI and China data exacerbated the decline in the NZD/CAD coupled with the overall weakness of the Kiwi. The fact that the only CAD data we received this week was retail sales on Wednesday, during which time the CAD traded within a 26 pip range strengthens this claim. Also, note how 92% of the 248 pip move lower occurred this week. Notice that the only currency in which the CAD gained more against the Kiwi was the Yen. My initial observation was that if the pair could close below the .93270 area, I wanted to be short. We fell into this area earlier this week, but the Kiwi retraced and closed higher Wednesday after CAD data.
Thursday we gaped down. I’m now giving the pair time to show short term upward momentum. Over the coming days, if we fail to break resistance of the gap bar, I’ll be targeting the .89600 area. A break and close below the .9164 area is another way to enter or add to the trade.
The Kiwi rallied some 1500 pips against the CAD from the beginning of last year until April of this year, thus there’s a bit of room for a retracement. I think the CAD has the potential to strengthen to within the .8820 area. The U.S. is on pace to rap up QE ahead of schedule, and the economy is strengthening. This bodes well for the CAD. If the risk theme shifts, this could potentially accelerate the Kiwi’s decline.
The Aussie has been really buoyant as of late. I thought that AUD/NZD could possibly test the 1.0900 area but was expecting failure around this level which would have confirmed the H&S pattern that was developing. The fact that the pair extended I think is a testament to the market’s current view of risk. The S&P 500 has consistently moved higher which is a great gauge of risk themes. This bodes well for “risk on” currencies like the Aussie.
Another view of the market’s risk theme can be seen in the Yen crosses. Right now a number of the yen crosses are trading withing bearish wedges, flags etc, yet I believe the yen won’t gain strength until the market’s risk theme changes from risk on to risk off. The better than expected PMI figures out of China should provide continuation of the market’s current theme.This is probably why pairs like the USD/JPY, CAD/JPY, AUD/JPY, have been consolidating. USD/JPY has broken slightly out of the bearish wedge formation but has struggled for follow through. The EUR/JPY is at a pivotal support level in the 136.330 area and may be the first of the Yen crosses to show some follow through due to the fundamental backdrop of the EU. The AUD/JPY is a direct gauge of risk trends in the FX market. The AUD/JPY is near the highs around the 96.479. If we break this level to the upside, I think we could test the 98.304 level. However, the pair has consolidated within a bearish formation. Until risk themes change, any breakouts lower in these pairs may come with little if any continuation.
The EUR/AUD has been a good pair to short over the past couple of months. The pair broke out at the 1.5052 area in early April and has since continued lower (850 pips). There’s significant downside potential if we break these levels. I think we could test the 1.36108 area if we break and close below the 1.41330 area.
The Aussie in the short term is showing a lot of strength against pairs like the Kiwi. However, if we look back to the beginning of 2013, even at current levels the pair is down 1700 pips. This means that AUD/NZD could continue to run as it is relatively still at the lows and just gaining traction after bottoming out at the 1.05387 level. Also the fact that we gapped up tells me that a lot of traders went in heavy on the short side and the Aussie CPI figures along with China PMI figures not only brought in more buyers but also triggered the shorts stops, hence a gap up. From a technical standpoint, the pattern almost couldn’t been better which is what led to a lot of traders probably entering prematurely. Once the Aussie broke the 1.0900 area, which where a lot of stops should’ve been, then we were off to the races. Over time, we could very well test the 1.16086-1.1840 area as long as the market’s current theme remains in place.
The Aussie rallied 40+ pips yesterday on inline CPI figures. Later today we’ll get the rate decision from the RBNZ. I’ve been eyeing the AUD/NZD. From a techincal standpoint we appear to be rounding out the top of the 2nd shoulder in a head and shoulders pattern. Earlier in late May early June, we completed a break out of a rising wedge formation which was the precursor to the head and shoulders.
Fundamentally, the RBA still feels as though the Aussie is high by historic means. In contrast, the RBNZ has been the only major central bank to raise rates, and to do so consecutively.
I would look to get short around the 1.0900 area which is prior resistance of the 1st shoulder, or catch a breakout below the 1.08500 area. The 1.06330 area or neckline is a good place to either take profits or cut half of the position. Ultimately, over the coming months, I would target the 1.0860 area.