LONDON (Reuters) - Stocks are showing the kind of volatility that preceded major falls in the past, suggesting to some that one of the most blistering U.S. rallies on record may be nearing its end.
The market is undergoing big swings under the influence of plunging oil prices and resulting turmoil in Russia, as well as the Federal Reserve's only gradual shift away from ultra-low interest rates and - on Tuesday - data showing a sharp acceleration of the U.S. economy.
The series of short-term rallies and selloffs has revived memories of events before the "Black Monday" crash of October, 1987, and more recently the global crisis of the past decade.
The S&P 500 has more than trebled from its post-crisis low of 666 points in March 2009 .SPX. The Dow Jones Industrial Average .DJI climbed above 18,000 for the first time after Tuesday's data showed GDP grew at an annualized 5 percent in the third quarter, the fastest rate in 11 years. That means the Dow has gained 1,000 points in just one week.
Larry McDonald, senior director and head of U.S. strategy at Newedge in New York, noted wide price swings before deeper and longer-term declines as previous bull markets ran their course.
"You had a lot of this in the summer of 2007 and the summer of 1987," he said. "Our systemic risk indicators are showing a very high scoring in terms of risk. I think we are anywhere from two to eight weeks away from the big one – a fall of 10 percent or more."
A 10 percent reversal in markets is often termed a "correction".
Already on Monday the S&P and Dow had both notched up yet another record closing high. For the S&P it was the 50th this year, the most in any year since 1995.
Other examples of the high volatility abound. The Dow jumped 421 points last Thursday, marking its biggest daily rise this year. That took gains over the Wednesday and Thursday to more than 700 points, its sixth biggest two-day rally in history.
This surge was fueled by the Fed, which said last Wednesday it would remain "patient" in keeping interest rates ultra-low, and followed a stomach-churning fall the week before.
Russia's currency hit a new all-time low, due partly to the drop in the price of oil, its major export. The ruble's 12 percent fall on Dec. 15 alone was its biggest daily loss since the 1998 crisis. And oil's slide accelerated, taking Brent crude down almost 50 percent since June to a fresh five-year low.
In the week ending Dec. 12, the S&P fell 3.5 percent, breaking a run of seven weekly gains and recording its biggest weekly loss since May 2012.
"It's very unsettling. The market shouldn't be doing this. It's almost got an air of 2007-2008 about it," said Mark Ward, head of execution at Sanlam Securities in London. "The Dow shouldn't be rallying 400 points, the biggest rally in years. The news isn't good enough to see the rallies we're having and the news isn't bad enough to see the sell-offs we're getting."
The roller-coaster ride of the last few weeks may be an indication of what's to come if similar periods of volatility in recent history are any guide, said Ashraf Laidi, head of global strategy at City Index in London.
Before the bull runs in the S&P from 1995 to 1999 and from 2003 to 2007 ended, investors also faced wrenching price moves, as the following graphic shows:
Laidi noted that the S&P has risen for seven consecutive weeks on nine previous occasions, but never in those cases did the index fall more than 2 percent in the week that ended the winning streak. The S&P's 3.5 percent fall in the week ending Dec. 12 "shows an unprecedented departure in sentiment from greed to fear", he said.
That fear, however, should not prevent the rally continuing as long as economic growth and easy monetary policy around the world underpins corporate earnings and profitability.
Investors have been through this before. In the past strategists, worried about the longevity of the rally and global economic signals, have said it's time stocks took a break, only to see them rocket higher in the months that followed.
Investors wary of missing out on what could be a late-stage bull market have been jumping in, quickly seeking bargains after two near-corrections in the last three months.
However, with valuations stretched and wages starting to rise, particularly in the United States, corporate results will have to be stronger to maintain stock-price gains. Otherwise, the squeeze in margins is likely to yield meager price appreciation in 2015.
The most recent Reuters quarterly poll of equity strategists suggests a 6 percent rise in the S&P in 2015 and a 9 percent and 10 percent gain in Germany and France, respectively.
While further gains may be harder to come by, it may be too early to call the end of the bull market.
"Volatility is a fact of life in financial markets and next year looks set to be more unsettled than this one," said David Stubbs, global market strategist at JPMorgan Asset Management in London.
"But investors should consider looking through short-term market swings and stay invested to benefit from the uptrend in corporate earnings we are expecting to see on both sides of the Atlantic."
Reporting by Jamie McGeever; Additional reporting by Lionel Laurent and Mike Dolan in London, David Gaffen in New York, graphic by Nigel Stephenson; editing by David Stamp