When Monday began, a lot of investors and traders could be excused for thinking the stock market was holding up quite well -- considering the worries about cuts in federal spending and a resumption of worries about political and economic instability in Italy.

But the stock market slid during the day, and then just plain tanked. The Dow Jones Industrial Average ($INDU) closed down 216 points to 13,784, its worst loss since Nov. 7. Those cheery feelings about the resilient market? Gone.

The Standard & Poor's 500 Index ($INX) fell 28 points to 1,488, that exchange's worst loss since Nov. 7. And the Nasdaq Composite Index ($COMPX) dropped 46 points to 3,116, the worst loss since Wednesday.
Italian voters appear to have knocked Prime Minister Mario Monti out of office and brought back, at least as a power broker, former Prime Minister Silvio Berlusconi. The often controversial Berlusconi has vowed to undo many of the austerity measures enacted to get Italy some needed help with its massive debt.

And Berlusconi has a less-than-savory reputation. He was indicted on corruption charges and is notorious for womanizing. The markets, meanwhile, aren't happy. The iShares MSCI Italy (EWI) exchange-traded fund, which invests in Italian stocks, was down 71 cents to $12.23 late Monday afternoon. The ETF is down nearly 16% since it became apparent in late January that Berlusconi's prospects were much better than anticipated.

It's not clear if Berlusconi will take power again. In fact, the big problem is that it's not clear just who will be in charge.

Back home, another big reason for the market's pullback, according to Hugh Johnson of Hugh Johnson Advisors in Albany, N.Y., is the realization that sequestration is going to set in, producing spending cuts across the federal government.

The market already was already pricey, Johnson said Monday, with the S&P 500 overvalued by as much as 6.3% over where it should be. The big gains in January were too much, too fast, and, with today's big loss, the index is now down 0.7% for February. The Dow, meanwhile, is off 0.6%, while the Nasdaq is down 0.4%. 

Johnson's estimate comes from measuring earnings and price to earnings ratios, to come up with what he calls a "fair value" for the index.

For the the market to move higher required, as he put it, "everything has to go right."

But it isn't. Sequestration looks like it will drag on for months -- and if it goes to the end of the year, it could knock a half-percentage point out of the economy, maybe more. Some 791,000 federal employees have been told they may be furloughed and see their salaries cut by 20%. An additional 46,000 temporary workers have been laid off.

It means companies like Boeing (BA) will continue to build F-18 jets, but the government will delay buying engines for them. It means cuts to education, Medicare, basic health research, and reductions in other programs and services.

Boeing, one of the three largest defense contractors, was down $1.42 to $75.24 this afternoon.

Jeffrey Saut, the chief investment strategist at Raymond James & Associates, thinks the market slump will be short-lived, maybe to the end of March, because he thinks Republicans and Democrats will find a way to a solution. It may not be a pretty solution, but it will happen.

But getting there means a short but nasty pullback, he said Monday, perhaps 5% to 7%.

Like Johnson, Saut believes the market has gotten ahead of itself. There were 37 straight sessions where the S&P 500 avoided a 1-to-3 day pause or pullback. The last time that happened was in the summer of 1987 -- which was followed by the horrific October 1987 crash.

More on Top Stocks

• iPad 5 leak points to June release
• REITS worth bragging about
• Will anyone miss the Nook?