Monday started off with bulls ramping stocks higher out of the gate. Then the Italian election results came out and it doesn’t appear likely that Berlusconi, Grillo, or Bersani will be able to form a coalition government. Worse, was the result that there was no outcome, meaning the country had become ungovernable. (Wasn’t that always the case?) But the stakes are high within the eurozone given coordinated efforts to deal with austerity and previous commitments. One sad aspect of the voting was the report that this was the lowest voter turnout since WWII. What does this reflect? Simply, voters feel helpless with the choices. (Let’s not forget this may apply to us as well.) Anyway, this event caused markets to abruptly reverse course. It created a bearish outside day technically when markets opened on their highs then close near the lows.

A chain reaction ensued as investors suddenly remembered the UK credit downgrade and over-extended currency markets like the yen (FXY), which sold-off hard. European stocks (IEV) began the day sharply higher (as much as 2%) then sold-off to close unchanged.

Before all the bearish chaos, investors seemed to not notice the poor PMI data from China showing growth cooling once again (50.4 vs 52.3) —the worst in four months. Without China growth, you shouldn’t expect too much global growth overall. It’s just the way things are now.

All this chaos benefitted the dollar (UUP), gold (GLD) and bonds (TLT). Selling in U.S. stocks was widespread and took on a “crash-like-get-me-out” feeling. Some may be inclined to suggest the sequester was another reason for selling but that seems a stretch since most have stated it’s going to happen. Even the POMO Monday didn’t stop the bleeding.

Thankfully, our proprietary trading system kicked in with sell signals this weekend and thus raised our flagship portfolio to 40% cash.

Perhaps the chart of the day belongs to Wisdom Tree Japan Hedged ETF (DXJ), which was one of the biggest performers of the year until today.

Tuesday and Wednesday the Bernank will have opportunities to repair stock market damage with uplifting hints and rhetoric which is designed with that in mind. No doubt the Fed has focus groups developing talking points for these two events.

Volume once again exploded to the upside more than tripling Friday’s rebound. Breadth per the WSJ was quite negative.

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