TORONTO (Reuters) — The seesaw volatility that has become the trademark of the Toronto Stock Exchange this year has market watchers worried that it could foreshadow a market downturn.Observers warned of choppy trading at the start of 2007, but three months in, the trend shows no signs of abating, most recently rattling investors’ nerves in late February.

After plunging hundreds of points at the end of last month on concerns over growth in China, the S&P/TSX composite index abruptly reversed on March 6, gaining almost 157 points, and trended higher for several more sessions. Then, on March 13, it switched again and slid more than 250 points.

On Friday, the index finished higher by 98.02 points, or 0.75 percent, at 13,237.66.

“I think you get volatility when you have uncertainty, and it normally comes at the end of a market where it’s like musical chairs, and you’re down to the last three, and everyone is frantic,” said Douglas Davis, president of Davis-Rea Ltd. in Toronto.

Davis thinks the volatility could mean the Toronto market’s bull run — which saw it rise 14.5 percent in 2006 — is coming to an end.

“I think you have a lot of hedge funds ... roaring in, roaring out, shorting here and covering there,” he said. “You don’t have a lot of hedge funds at the bottom of a market. They don’t seem to be doing much at market bottoms. They do a lot at market tops, when they’re feeling really confident.”

There are some, unlike Davis, who predict strong gains for the TSX in 2007. CIBC World Markets, for instance, sees strong global economic fundamentals pushing the main Toronto index to finish the year at 14,250.

Oil prices, despite being off from record levels, remain historically robust. Demand for base and precious metals also hasn’t evaporated.

And Finance Minister Jim Flaherty said Friday that the risk to the Canadian economy from a slowdown in the US housing market is only moderate.

All these factors should bode well for a market like Toronto’s, which is skewed heavily toward energy, resources and financials.

Still, some worry the protracted volatility is more than just business as usual.

“I still think we have a good chance of getting below that 12,000 again and maybe even migrating toward the 11,000,” said Adrian Mastracci, portfolio manager with KCM Wealth Management in Vancouver.

“If I had to really bet, I would probably see the downside first as a higher probability in the near term, and then upside thereafter,” he said, adding, however, that without risk and volatility, there would be no rewards for investors.

Mastracci also noted there is a lot of money <\m> including billions that have been raised by hedge funds and private-equity firms <\m> that is looking for investment opportunities “and it’s going to be bumpy.”

And while earnings growth may still be stable both in Canada and the United States, and economic fundamentals remain relatively sound, it’s investor sentiment that’s of concern.

“Historically, increases in volatility like this have heralded important turning points,” said Elvis Picardo, investment strategist and analyst at Northern Securities. “There is a certain degree of nervousness in the markets,” he said. “The theme seems to be, ‘Let’s sell into the rallies, rather than buy on the dips’.”