A European Debt Revival

Global markets took it on the chin yesterday after unexpected Italian election results materialized.

That’s right: Europe matters again. The never-ending crisis returns! Fear has found its way back into the markets…

The major US indexes ripped higher out of the gate Monday morning. But as soon as anti-austerity votes began to pile up across the pond, spooked investors began making excuses to sell…

By 4 p.m., the S&P had dropped more than 1.8%– its biggest decline of the year. The VIX–which sat at multi-year lows last week–ripped higher by 34%.

Global Macro Monitor reminds us that this dramatic move in the fear index is the 10th largest daily percent increase since 1990– and its biggest jump since August 2011. The data on the weeks following a major VIX pop are about even, with the S&P posting positive returns five out of the past nine occurrences.

Still, it’s apparent that the short-term market attitude has gone negative. We had a couple of big distribution days last week where down volume ruled the day. Now, with yesterday’s sharp decline, it’s clear that the weak hands want out.

Here are a couple of quick notes to help you find your way this week:

The financial and homebuilding sectors were hit hard during yesterday’s selloff. These were a couple of the market’s best performing sectors. Watch them closely to see if investors are rotating out of these names…

Next, it’s important to remember that bad data hasn’t made much of an impact so far this year. We have housing and consumer numbers coming out today, along with additional data later this week. If investors decide that lackluster numbers are reason enough to bolt, you’ll know the market’s mood has shifted back to fear.