Markets fear U.S.

chilled by more than weather

Weak U.S. manufacturing data, on top of more news of slowing activity in China, sent stocks into a
tailspin and signaled to some traders that the correction could be deeper than they expected.

The big slidetaking the S&P 500 2.3 percent lowercame amid fireworks in other markets. The
Nikkei fell nearly 2 percent, sending the index into a correction of over 10 percent since the
beginning of the year. The dollar weakened, the yen rose and emerging markets continued to
flounder. The VIX, the CBOE's volatility index, shot up nearly 15 percent to over 21.

(Read more: Stocks unravel after factory report )

The Institute for Supply Management manufacturing index showed Monday that activity had fallen
to an eight-month low of 51.3 in January, well below the 56.5 in December. New orders plunged to
51.2, a drop of 13.2 percentage points from December. The index still shows expansion because it is
above 50, but it is far weaker than expected and raised red flags that U.S. growth may be slower
than thought.

(Read more: Stocks down in January...if history repeats! )

"We're seeing other confirming reports that the economy is not delivering in the zone we were
expecting," said Jack Ablin, chief investment officer of BMO Private Bank. "I'm sure I was part of the
consensus thinking interest rates were going to rise and bonds were not going to be a good place to
be, and the economy wasn't only expanding but accelerating."

Ablin said he thought valuations were too high and that he is looking for a pullback to put more
money to work.

"I think we could get a correction of 10 percent or more," he said.

The poor ISM injects even more anxiety into the market ahead of the January employment report
Friday, which is expected to show 185,000 new nonfarm payrolls. That number is a key metric
watched by the Fed. Last month's weak 74,000 was blamed on weather but raised concerns about
growth. The weak number also follows a slowdown in China's manufacturing sector. The official PMI
dipped to 50.5 last month from 51 in December, while private sector numbers showed contraction.

"We now have some additional fundamental confirmation of the fact that the [U.S.] recovery is not
going in a straight line," said Ian Lyngen,senior Treasury strategist at CRT Capital. Factory orders at
10 a.m. is the only data expected Tuesday.

(Read more: Good intentions pave way to mayhem )

The S&P 500 was off 3.6 percent for January, and its decline Tuesday gives it a 5.8 percent loss for
2014. The decline was spurred partly by a selloff in emerging markets, which have been reacting to
concerns about slowing global growth at the same time the Fed is tapering its bond- buying
program.

"People were hoping to get 5 percent on the downside," said Patrick Boyle, a trader with BTIG.
Traders were looking to buy into that type of drop, but investors may be looking for further declines
since it happened so fast, he said.

"It's not the end of the world, Boyle said. "People just didn't think we 'd see it until March or April."

The S&P's decline is its worst since the fall, when it fell 6.3 percent into October, but the market has
not had a real correction10 percent or moresince its 17 percent decline in 2011. The S&P sold
off 9.8 percent in 2012.

"The number was much weaker than expected, and the market is very sensitive at this point to
thinking that the Fed has started the policy normalization process too soon," said Barry Knapp, head
of equity portfolio strategy at Barclays.

As stocks sold off Monday, bonds saw a rush of buying, which pushed the 10-year yield below 2.6
percent for the first time since early November.

"We priced out 46 basis points of tapering, and nobody's changed their mind on tapering," Lyngen
said. "No one is saying they're going to increase bond purchases, go the other direction. So it's
purely a positioning-and-flight-to-quality move."

The Fed has pared $20 billion from its bond buying and is now purchasing $65 billion a month in
Treasurys and mortgagesa program expected to wrap up by year-end.

The big market move comes on the day Janet Yellen was sworn in as Fed chairman.

"The market is testing the new chairman," said Boyle.

Knapp said at times when the Fed is pulling back from easing, the market typically overreacts to any
negative news that would suggest the policy is going the wrong way.

"As we know, the Fed's specialty is not taking the punch bowl away too soon," he said.

The market usually gives back about 8 percent during a Fed policy reversal, Knapp said, and the S&P
could go down to 1,700 during the process.

(Read more: Cashinwhy stocks are getting slammed )

While the U.S. economy was the focus of Monday's selling, economists have been looking for effects
of bad weather in all January data. The weak ISM number was blamed on weather, as were weaker-
than-expected auto sales.

"It's not a great season for automobile purchases," said Ablin. "Who wants to test drive a car when
it's minus 10 and there's a bunch of snow on the ground. ... Seasonal adjustment is one thing, but
this is extraordinary. You can't adjust for this kind of thing. Last year at this time, we had a couple of
days in the 60s."

Earnings are expected Tuesday from BP, Toyota, Archer Daniels Midland ADM, UBS, Gannett GCI,
Becton Dickinson, HCA, Emerson, Eaton, Clorox CLX, Michael Kor KORSs, McGraw-Hill Financial,
Delphi Automotive, Sirius XM, Fidelity National FNF and Boston Scientific ahead of the opening bell.