With the markets making quick work of Dow 25,000, here's the crucial issue: With so much good news now built into the market, is there room for higher prices?
Can you smell it? It's a slight whiff of euphoria around the stock market rally, the first time I have smelled it in a long time.
Oh sure, the market has been richly valued for a long time, but that's different than euphoria. A lot of people suddenly seem to believe that things are going to get a lot better in 2018.
Maybe, but remember one of the best things the market has had going for it for the past seven or eight years is how hated the rally has been.
Now people are starting to like the rally. A lot. Makes me a little nervous.
Here's something else that makes me nervous. The bar is now very high on the two most important components for stock valuations: economic data and earnings.
The recent data have surpassed expectations, particularly in the U.S. The ADP jobs report was way above expectations, but that has happened a lot recently.
Just look at these recent headlines: "Strongest month of job gains since March 2017," "Job-cut announcements in 2017 see lowest level since 1990, Challenger report says," "Commodity prices hit highest point since 2014."
See what I mean? Citigroup's Economic Surprise Index, a measure of how much recent economic stats have been above or below expectations, is now at the third-highest level since the financial recovery.
Economic growth well above expectations could be an issue for stocks. Pretty soon, we will be back to debating when "good" economic news is "bad" for the markets because it increases the chances the Fed will suddenly get more aggressive on rate hikes.
You will know we have reached that point when the market suddenly droops on economic data that comes in above expectations. That's why a lot of traders will be watching the market reaction if we get a blowout number on the jobs report Friday morning.
Earnings are expected to grow more than 15 percent this year. The upcoming earnings season had better be damn positive. I'm not talking about just earnings beats. I'm talking about more buybacks AND more capital investment. The whole enchilada.
The problem is we are in uncharted waters because the move to Dow 25K has come so fast. We not only rallied going into the close of the year, the rally at the start of the year has taken everyone by surprise, far surpassing the typical first-day putting-money-to-work story.
The breadth has been particularly impressive. Everything is up. Big caps and small caps. Growth and value. Cyclicals and staples. The only sectors not participating are interest-rate sensitive REITs and utilities, which are bond proxies.
Look, I am not by nature a bear, but when you start seeing the broader press mention the Dow at 25,000 — as we saw Thursday — sit up and take notice.