Santoli: Extreme bullish sentiment may mean Dow set for breather at 20,000

The Dow Jones Industrial average passing 20,000 doesn't matter in any essential way, of course. But neither does a ballplayer getting his 3,000 career hit. Yet in both cases, the drama builds, the retrospectives flow and the critical assessments are made.

In the case of the Dow's approach to 20,000, it's happening in a fairly routine sense on one hand: Gentle pre-holiday trading, in the season of upside bias for stocks, with all the major indexes levitating by 0.2-0.4 percent. Market breadth is solidly positive, but not so much that it shows urgent, indiscriminate buying. The happens to be tussling with its former record high as the Dow is teasing 20k. The "risk-on" sectors are getting a lift. Just another "tack-on day," six weeks into a persistent rally.

Here's what I'm watching heading into the closing bell:

One thing to note: The milestone, if it comes today or this week, will arrive at a time when investor sentiment pendulum has already swung pretty far to the bullish side. Surveys, options action and other measures of investor emotion show plenty of optimism, as does this plunge in the assets in a leading "bear" fund that offers downside exposure:

This doesn't spell doom for the markets, but it usually means this upward thrust is mature, and better entry points might come in the near future. Combined with the now-familiar pattern of strong December/weak January the past few years, maybe this all points to Dow 20K being more a culmination move than the start of a new leg higher.

Much talk of the Dow 20K headlines possibly luring the heretofore hesitant retail investor into stocks. I do think there's a chance that we could see a phase of public excitement toward equities and the economy at a time when bonds look dangerous and "good news equals good news." But this shouldn't be mistaken as the very start of something important, in my view.

Stocks are up 235 percent in nearly eight years, valuations are full if not rich, the credit cycle is sturdy but not young. What's certainly happened is the post-election rally has given cover for many long-bearish investors and commentators to flip bullish on the notion that "everything has changed." The risk is that this is more narrative than reality, and that not terribly much has changed for sure. Investors might be better off if this rally is less purely about Trump and somewhat more about an upturn in global growth and a coming revival in corporate earnings – with potential deregulation and fiscal stimulus as bonus.

Macy's, BlackRock, Wells Fargo and Caterpillar each up more than 1.5 percent today certainly send a reassuring message about the economic direction, if the market's view on such things can be trusted. Financials certainly are the "must own" items this season, though here again it's a bit puzzling that they're being cast as a victimized, neglected group when the bank stocks have outperformed the S&P 500 for the past 1, 2 and 5 years and since the March 2009 market low.

Credit markets remain a bulwark against significant weakness, the world wants U.S. corporate debt even as the dollar grows quite expensive to hedge into year end. This is not flashing any warnings at all. The VIX under 12 is not itself a danger sign, purely reflective of calm December pace and likelihood of slow markets. Yes, it also reflects lack of hedging demand, but until VIX bottoms and turns higher the market can keep grinding higher if it chooses. Waiting to see if we get a wave of strategists upgrading 2017 index targets, so far the consensus is only mildly bullish.