S&P 500 And Volatility In 2007 Vs. 2014 (Part II)

I noticed back in July that the S&P 500's chart kind of looked like its chart in 2007 when the VIX, the S&P 500 volatility index, was just starting to rise. Now in mid-October, it looks like the S&P followed that path somewhat. In the second half of 2007, violent corrections and bounces ultimately formed the top of the 2002-2007 bull market.

S&P 500 and VIX in 2007
Source: Stockcharts.com

S&P 500 and VIX in 2014
Source: Stockcharts.com

Bounces will probably be fueled by QE speak out of the Fed and ECB (Bloomberg headline today: "Bullard Says Fed Should Consider Delay in Ending QE"). Additional liquidity, low wage inflation and economic growth could keep the bull market going. Tom Lee, co-founder of Fundstrat Global Advisors, thinks we'll see a "very strong finish to the end of the year" because the fundamentals haven't changed and "we have a tailwind coming from lower oil."

But, if rate hikes become more probable in 2015 and QE4 becomes less probable, which would pull liquidity from the system, that scenario is likely to fuel more volatility and market declines. On October 3, 2014, Sam Stovall, Chief Equity Strategist at S&P Capital IQ, told CNBC:
I still believe that the Fed will not be raising rates until the middle of next year at the earliest. I do worry, however, that within that six month time frame, history says but does not guarantee that we usually see a topping out pattern where more than 80% of the time we have then fallen into declines of anywhere from 5% plus, with the average being 16%.
Related post: Sterne Agee's Carter Worth: Stock Market Correction Is Not Over (10/13/2014)

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