"Without today, you would have seen yields moving ... higher," said Dennis Gartman, publisher of The Gartman Letter. He said traders would have been discussing when the Fed would move to hike interest rates. "But this circumstance today trumps that; it takes all of those other concerns off. This is the only thing the market is going to focus on for the next 48 hours."
Traders say once more facts surrounding the downing of the aircraft come out, the markets should go back to focusing on the Fed, the economy and earnings if there is no escalation of the situation between Russia and the Ukraine. One concern was a report that Russian President Vladimir Putin blamed Ukraine for shooting down the jet.
"The economy is clearly accelerating. At the end of the day, what's going to drive stocks is earnings and economic growth," Canally said. "What weighs against this is in a year, you typically get four 5 percent pullbacks. So we had one this year. Last year we had only one or two and we haven't had a 10 percent correction since 2011. You usually get one a year. But I think this will get bought rather than sold."
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Canally said markets will be watching to see if the Malaysia Airlines downing intensifies the standoff between Russia and the West over Ukraine. The U.S. on Wednesday announced a new round of sanctions against Russia.
"As these details get sorted out, the markets need to decide if this is enough of an escalation of the conflict that's been going on to warrant a pullback," Canally said. "Does it truly impact global growth and the earnings of U.S. companies? That tells you if it's more than a couple-day blip, 5 percent, 10 percent."
Canally said the sectors that typically get bought during times of uncertainty are the safe haven utilities, telecom and health-care sectors.
There were dramatic reactions in other markets. Wheat futures initially jumped more than 3 percent, and corn was slightly higher on speculation that any disruption in exports from Ukraine or Russia could result in more demand for U.S. crops.
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Gold futures, under selling pressure this week, were up 1.3 percent, or $17, at $1,316.90 per troy ounce. Silver, moving with gold, was up about 2 percent. The yen gained further ground against other currencies, as the dollar slid with Treasury yields.
Gold futures broke above the 100-day moving average of $1,304, which it had fallen through earlier this week before finding support at the 50-day, about $1,293.
"These events are very fast moving. If it I doesn't escalate further, we could conceivably see prices fall back down. It's been pretty much thin in the market, given the summer conditions. A lot of technical movements," said Howard Wen, precious metals analyst at HSBC.
Oil, already higher on the day, gained further. West Texas Intermediate was up 2 percent at $103.10 per barrel. Brent was up 0.6 percent to $107.80 per barrel.
Wheat futures closed up 2.4 percent at $5.50 per bushel.
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"After the report started hitting the wires, we saw a lot of short covering coming in. There was a lot of knee-jerk reaction to the report," said Shawn McCambridge, commodities analyst with Jefferies Bache.
Ukraine and Russia are both major wheat producers, and ship lower-priced wheat and corn. "If it were to be affected or even a deterrent to end-users awaiting shipments of wheat or corn that could shift business to the U.S."
Winter wheat is currently being shipped, he said, adding that the USDA puts combined projected wheat production from Russia and Ukraine at 19 percent of the world's total. Ukraine's wheat crop is projected at 9 million tons and Russia at 19.5 million tons.
"They have been very aggressive in the market and captured much of their recent business," McCambridge said. "Depending on what happens in the next couple of days, it could certainly change the market dynamics and world trade."
Wren said the reaction in stocks was natural, and he has been saying the biggest risk to stocks this summer is event risk, not the U.S. economy.
"The markets need clarity on just what happened," he noted. "Uncertainly over an event (cause, etc.) usually results in markets trading down ... traders taking a little money off the table and waiting to see what happened."
—By CNBC's Patti Domm