"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 correction—10 percent or more—since 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."