Are we headed for a correction or aren't we?
With the ASX200 down around six per cent from its highs for the year, it's a question many investors are pondering.
We're already halfway there. The technical definition of a correction is a slide of 10 per cent or more, and many analysts say further falls are likely.
Peter Esho, Managing Partner at 100 Doors, expects the market to find some support over the short term after the recent slide, but says it will probably trend lower during the next few months.
The biggest weak spot, he says, is the big four banks which, despite technically already being in correction territory, are still considered by some to be overvalued.
The Commonwealth, ANZ, Westpac and National Australia Bank have rallied in recent years as cautious investors looked for relatively safe stocks paying reliable, healthy dividends.
But, Mr Esho says, the prospect of interest rate rises over the next few years and an uncertain economic outlook, together with high valuations, make the banks less attractive.
"There is a lot of vulnerability in the Australian economy at the moment and the banks are not immune to that," he told AAP.
With the banks making up an oversized proportion of the market, a slide there could be enough to drag down the ASX200.
IG market strategist Evan Lucas said the US market would be the key to what happens next.
The S&P500, Dow Jones Industrial Average and Nasdaq have had a terrific run since the global financial crisis, pumped up by the Federal Reserve's stimulus efforts.
But the Fed will end its asset buying program in October and is expected to start hiking interest rates in 2015, which could take some steam out of the market there.
And, a sliding US market is very likely to lead to further weakness for the ASX.
"I'm very, very nervous about the Aussie market at the moment," Mr Lucas said.
But OptionsXpress market analyst Ben Le Brun said that while some sectors of the market are likely to remain weak, especially the resources sector, defensive stocks like Woolworths and Wesfarmers and utility providers will likely hold up fairly well against a market correction.
And companies with earnings offshore, like Amcor, Ramsay Healthcare and QBE, would be the best performers.
"Longer term, it'll be those offshore earners that will lead the way," he said.
