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Fear factors that are crushing stocks

The first diagnosis of an Ebola case inside the U.S. added pressure to an already shaky stock market and helped spur a flight to safety in Treasurys, as the deadly virus became the latest macro concern to jar markets obsessed with a decline in global growth.

But traders say the selling was only partly due to macro concerns, and there were some signs of investors shifting out of stocks and buying bonds, despite the fact that stocks are often bought at the start of the quarter.

Art Cashin, director of floor operations at UBS, said technical weakness in the S&P 500 was a factor, with selling accelerating after the index fell the 100-day moving average at 1,955. "There are some signs of geopolitical concerns, more in the morning" he said. "I think things are starting to weigh on themselves."

The latest disappointment on the economy was Wednesday's U.S. ISM manufacturing index which showed a still solid expansion at 56.6 but fell bellow August's reading of 59. That follows softer PMIs overnight in the U.K. and Germany, where there was actually a contraction.

Read MoreWhy October could be a turning point for stocks

Stocks fell, with the Dow in a more than 200 point decline, off over 1.2 percent at midday, and the S&P 500 down 1 percent. A major negative was another 1.1 percent drop in the Russell 2000, down more than 3 percent for the week but now in official correction territory with a 10 percent decline from its July high.

"There's an allocation trade driving stocks lower. Last month was a pretty brutal one for the small cap sector. There's a little bit more of a growth concern," said one trader. "There's a lot of different things going on. There isn't panic in the market but I do think the market could go lower."

The Dow transports were also pummeled, losing 2.1 percent, as traders sold airline stocks on the theory profits would be hurt by either flight restrictions or a drop in travel if the Ebola virus appears to be spreading beyond West Africa.

Biotech stocks with links to potential Ebola treatments were among the winners. Some names include Tekmira Pharmaceuticals, Sarepta Therapeutics and Newlink.

Read MoreShares of Ebola treatment makers rise

The buying momentum in bonds continued to accelerate into midday. The yield on the 10-year was at 2.40 percent, a significant decline from the 2.50 earlier in the day.

"It's marginally fundamental, but largely a momentum trade," said Ian Lyngen, senior Treasury strategist at CRT Capital. "On the margin, I think the risk off sentiment has been furthered by reports of Ebola on the shores of the U.S."

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Lyngen said he does not anticipate the 10-year getting much below a range of 2.40 to 2.38. "Five-year yields are still solidly in the middle of the range so they could grind a little lower in yield terms. This is a pretty big day for 10s," he said. "There is an opening gap from a technical standpoint at 2.34 to 2.35. That's meaningful resistance." The dollar, higher ahead of the U.S. open, gave up gains and was lower at midday.

"I think it's Ebola, and U.S. equities are lower and U.S. rates are lower. I think people are panicking about how big it's going to get and how it's going to impact global trade," said Robert Sinche, global market strategist at Pierpont Securities.

The Ebola case was discovered in Dallas in a man who arrived in the U.S. from Liberia on Sept. 20. His first symptoms showed on Sept. 24, and he was hospitalized four days later. He is now in serious condition in isolation at Texas Health Presbyterian Hospital.

Read MoreNo other suspected Ebola cases in Texas

The case is the first of an individual to have developed symptoms in the U.S., raising concerns that others may also have had contact with the virus.

Read MoreAirline shares lower on Ebola fears

Sinche said since Ebola spreads differently that SARS, for instance, it does not seem to be a major threat, but markets are nervous nonetheless. Ebola spreads through contact with bodily fluids. It does not spread through the air or become contagious until individuals with the virus have symptoms.

With Ebola as a background worry, some traders say tensions between Russia and Ukraine remain an ongoing concern, as is the battle against Islamic extremists in Iraq and Syria, and the protests in Hong Kong.

But the markets are especially obsessing about the weaker data, ahead of Friday's jobs report. The EU on Wednesday said it has strong concerns about a decree passed by Russia threatening new tariffs on Ukraine exports.

"It's a wait and see for Friday. I think we want to see the employment report confirm that the last month was an aberration which we think it is," said Jack Ablin, CIO at BMO Private Bank. "We think we get a respectable number over 200,000 and growth is on track. It's not an accelerating economy but one that's certainly growing."

Traders say much of the talk about the report is about whether the 142,000 payrolls in August are revised higher, showing the job growth trend of the last seven months is in tact. Economists expect 225,000 jobs for September.

"We'll take our cue from Friday's number. If it's strong, it reaffirms the bullish theme. It allows fundamentals to catch up to expectations which to me is the biggest headwind right now," Ablin said.

Ablin said stocks typically rise in a midterm election year. "I will say look if you're worried about October, then you should be bullish about the rest of the year," he said.

Peter Boockvar, chief market analyst at Lindsey Group, said he does not see Ebola as much of a factor, beyond the pressure on airline stocks. He said the real culprit behind the selloff is the fact that the Fed's quantitative easing is coming to an end this fall.

"Yesterday, the midcap index closed below its 200-day moving average. It's clear the weakness in small caps is infecting midcaps now. The data overseas was pretty weak, and this is not a coincidence that this is happening as QE is ending," he said. "We can try to find all these macro reasons but people are much more sensitive and risk averse when QE is off."