Dubai reminds traders that stocks are on fragile ground

DUBAI&rsquo;S inability to meet its debt payments rattled stock markets across the world last week as the shock announcement sparked new worries about the health of the global economy and governments&rsquo; abilities to service their debt. <br /><br />The FTSE 100 index dropped 171 points on Thursday before regaining some of its losses in Friday&rsquo;s trading. Financial institutions were particularly hard hit and UK banks saw their market capitalisations lose a combined &pound;14bn on Thursday alone. The sharp drop was driven by investors concerned about British banks&rsquo; loan exposures to Dubai. <br /><br />But while the market reaction was almost certainly overdone due to the unusual circumstances &ndash; the American stock markets were closed on Thursday due to Thanksgiving and much of the Middle East was celebrating Eid on Friday &ndash; it reminded investors of just how fragile the recovery is and just how much the stock market rally is dependent on continued investor confidence. <br /><br />Spread betters should be as well prepared as possible for any other shocks and potential events that could rock the markets again. As City Index&rsquo;s Joshua Raymond points out, the market has been going all one way and it would only take a small pebble in the water to make big ripples. <br /><br />And there are plenty of those pebbles. Asset bubbles may well be forming in emerging Asia, thanks to monetary stimulus packages, which are also propping up world demand for base metals. If this were to dry up, then growth could slow &ndash; a nightmare for mining companies, global consumption and the ability of the region to drag the rest of the world out of recession. <br /><br />The removal of non-standard monetary easing programmes and fiscal tightening could see investors lose confidence in the markets, particularly if the pace of withdrawal is not monitored carefully. All these stimulus packages appear to be artificially keeping the market afloat.<br /><br />Such concerns, against a backdrop of high levels of unemployment and jittery consumers, mean that any such event &ndash; let alone a black swan occurrence such as North Korea or Iran declaring war, a terrorist attack or even a large-scale natural disaster &ndash; could easily frighten investors sufficiently to send the markets plummeting. <br /><br />Spread betters can capitalise on such market volatility through day trading and going short on falling markets in the wake of such events. But how can you predict what will rattle the stock market, and more importantly, how it will affect your positions? You need to examine your portfolio&rsquo;s exposure to potential risks such as sovereign debt default or metal prices collapsing, for example.<br /><br />The last 14 months have shown us how bad things can get and while the outlook is improving, we are by no means out of the woods just yet. Spread betters should be using guaranteed stop losses if they are imminently worried and research as much as possible to assess the potential risks to their positions.