Well, that didn't last long. Friday's celebratory blast above Dow 14,000, fueled by mediocre data, extreme optimism, and classic first-of-the-month automated inflows into retirement accounts, was being reversed Monday as traders were reminded that deep structural problems remain.

The focus was on Europe, where bank stocks and sovereign bonds were being hammered as political scandals threatened to bring down pro-austerity governments in Italy and Spain. Elections are due in Italy and Germany later this year, elections that could destabilize the current focus on budget cuts and bank rescues. With youth unemployment in Spain above 56%, Greece falling behind on its budget targets and former Italian Prime Minister Silvio Berlusconi promising tax cuts if he returns to power, the situation is primed for another scare.

A scare that, just a few days ago, seemed so remote.

I just returned to Seattle from the Orlando Money Show, where, amid widespread bullishness and a general postponement of disbelief, I focused on the fact that fundamentals didn't support this advance. No surprise I was in the minority. Economic data remains weak. The U.S. unemployment rate will likely jump over 8% in the months to come as GDP shrinks. German retail sales have fallen into recessionary territory as manufacturers there struggle with a strong currency. The United Kingdom is headed for a triple-dip recession.

Sentiment has reached an extreme as people were just unwilling to consider anything besides the meme that cheap money from global central banks could push stocks to infinity -- no matter what happened in the real economy. That explains things like the after-hours ramp in Amazon (AMZN) last week as its trailing 12-month earnings went negative (which has since been reversed). It explains why speculative, non-commercial long futures positions in the Russell 2000 small cap index have reached a near record.

And it explains why stocks could march higher, in a perfect 45-degree uptrend, on pitiful volume and breadth numbers as a narrower and narrower group of stocks pushed higher.

That's all ending now. Eurozone sovereign bond yields have ended their eight-month downtrend (Italy 10-year yield shown above) as two truths reemerge. One, cheap cash from the European Central Bank has not healed the root causes of weak banks and weak economies in places like Spain and Greece; and besides, the ECB is now starting to withdraw some of that cash. The issue is economic competitiveness and the need for exports and tourism, not liquidity. Two, the political calm in the region, as budget-cutting technocrats have taken power in the peripheral countries, is being shattered amid scandal and restive, recession-fatigued populations.

So there's all that.

But there's also all the issues we face here at home. In less than a month, we will be hit with the budget sequestration that was postponed as part of the New Year's fiscal cliff deal, worth $1 trillion in spending cuts. Then, at the end of March, we face the end of the continuing budget resolution. Republicans were successful in pushing through the "No Budget, No Pay" legislation that will withhold Congress' pay if each chamber doesn't pass a budget.

Expect another epic food fight over spending and tax issues.

And there are a multitude of technical reasons to expect the market breakdown to continue. Cyclical, economically sensitive stocks such as steelmakers are rolling over for the first time since November -- a precursor to market downturns. Net declining issues has returned to levels not seen since November today as pent up selling pressure is unleashed. High-yield "junk" bonds are in a full on downtrend -- a more mature and less volatile market that tends to act as a leading indicator for stocks.

In response, I continue to recommend investors position themselves defensively via the UltraShort Basic Materials ETF (SMN) and short positions in material stocks like AKSteel (AKS). I also believe the market is underpricing volatility, calculated in the CBOE Volatility Index ($VIX). I have push an aggressive bet on a rising VIX, dubbed Wall Street's "Fear Gauge," by adding two positions in the VelocityShares 2x Daily VIX (TVIX) to my Edge Letter Sample Portfolio.

Disclosure: Anthony has recommended SMN and TVIX to his clients.

Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.