The S&P/ASX 200 Index (INDEXASX: XJO) seems to be in full warfare mode. By warfare, I mean there is a fierce battle between the 'bulls' and the 'bears' over which direction stocks should head today.
When the market opened, the bulls were clearly in control, pushing the ASX 200 up all the way to 6,727 points. For a brief shining moment, it looked as though the 'correction' was over.
But at the time of writing, the bears seem to have regained the narrative and have dragged the index back down into negative territory at 6,633 points.
If the index stays in the red today, it will mark the fourth day in a row of market declines. We haven't seen something like this for a while!
So are we in correction territory? Well, not yet. A correction is typically defined as a drop of 10% or more of the broader stock market. And since the ASX 200 has 'only' fallen 7.64% from last week's highs to today, we aren't officially in this territory yet.
It seems relevant to also point out that once markets enter the 20% down territory, it's referred to as a 'bear market'. We were last near bear market territory in December 2018, but we're a long way off that definition on today's numbers.
Is the ASX vulnerable to a correction?
In my humble opinion, yes. The start of 2020 (until this week) had been defined by a surging stock market – both here in Australia and around the world. We were pushing on new record highs for a while, and the ASX even broke above the 7,000 points threshold for the first time ever in early January.
Think of the stock market like a Jenga tower – the higher it goes, the less strength it has to endure external shocks. And (if historical data is anything to go by) we were getting very high, very quickly – and not in a good way.
Now some of these highs were caused by companies increasing their earnings. But most of it was investors extending what they would be willing to pay for those earnings – which is a more dangerous way of bidding up stocks.
So all in all, I think the ASX was not in a robust enough place to weather the awful news that we have been seeing surrounding the coronavirus.
Foolish takeaway
I don't know the future, but I wouldn't be surprised if the ongoing worries about the coronavirus push the ASX into 'correction territory' in the coming weeks.
I'm not trying to whip up fear here, I just think that the fundamentals of the stock market right now make it vulnerable to this kind of threat. But if you invest Foolishly (capital F), I think you'll be well placed to weather whatever comes next, good or bad!
