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Financial markets are typically characterized by high (low) price level and low (high) volatility during boom (bust) periods, suggesting that price and volatility tend to move together with different market conditions/states. By proposing a simple heterogeneous agent model of fundamentalists and chartists with Markov chain regime-dependent expectations and applying S&P 500 data from January 2000 to June 2010, we show that the estimation of the model matches well with the boom and bust periods in the US stock market. In addition, we find evidence of time-varying behavioural heterogeneity within-group and that the model exhibits good forecasting accuracy. * Acknowledgement: This work was initiated while Huanhuan Zheng was visiting the School of Finance and Economics at the University of Technology, Sydney (UTS), whose hospitality she gratefully acknowledges. Financial support for Chiarella and He from the Australian Research Council (ARC) under Discovery Grant (DP0773776) is gratefully acknowledged. We would like to thank Willi Semmler and Lucas Bernard, the editors of this special issue, Remco Zwinkels and participants of the 2010 Guangzhou Conference on Nonlinear Economic Dynamics and Financial Market Modelling for helpful comments. The usual caveat applies.