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Investor fear on the rise

February 26, 2013: 10:15 AM ET

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Political gridlock in Italy is unhinging investors.

Investors worry the results of Italy's election could wind up undermining the progress that Italy has made in overhauling its troubled economy.

"It was the worst possible outcome, feared by market participants and European policy-makers alike," said Daiwa Capital Markets European economist Tobias Blattner.

U.S. stocks spiraled downward in a late-day frenzied sell-off Monday. European markets followed their cue and sold off sharply early Tuesday.

CNNMoney's Fear & Greed Index tumbled into neutral -- a level it hasn't touched in two months. It bounced out of neutral into greed but is still sharply down from the extreme greed level it was sitting in just two days ago.

The volatility sent the market's other fear gauge, the VIX, up 35% in one day. The VIX has surged more than 54% over the past five days, though it was also easing a bit on Tuesday.

As investors fled riskier stocks, they poured back into the safe havens of U.S. Treasuries and gold. The yield on the 10-year Treasury note slid further below 2% and gold prices are back above $1,600.

It wasn't all that long ago that Italy was on the brink of seeking a bailout. If the current gridlock can't be broken, investors worry Europe's debt crisis could roil global markets.

Investors were already getting worried about the bull market. Since the start of the year, they've returned to stocks but the pace of inflows has slowed considerably in recent weeks. At the same time, bond funds continue to be favored, with billions of dollars flowing into bond mutual funds weekly.

Still, even with the Italian wall of worry, bond yields have a ways to go before hitting a new record low and stocks are still up 5% to 6% this year. And the volatility of the VIX may continue but, at 19, it's also a bit away from its fear trigger level of 30.

And consider this. The last time, CNNMoney's Fear & Greed Index was in neutral, investors were worried about the economy falling off the fiscal cliff. This time around, they aren't worried about Friday's looming deadline for forced budget cuts, or sequestration. Most think it's just a matter of time before lawmakers reach a deal.

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