Congratulations to those who had the fortitude to step into a new long/bullish trade late on Tuesday or early on Wednesday, and then had the fortitude to stick with that trade. You're now up pretty nicely, for a two-day holding period. Gotta be honest though... I've got some concerns about the over-exuberant nature of the rally thus far. I know, I know - I've got "concerns" every day, most of which seem unnecessary. I'm ok with that. I'd rather explain to you everything that could go wrong with the market that doesn't rather than not explain all the risks and leave you a little shellshocked on the occasion things do go wrong. Anyway, my concern for you today isn't a horrifying one. I've said all along I don't think a bear market or a recession are on the horizon. My only worry is that stocks are overbought and overvalued and in need of a corrective move. The only thing worth exploring today is how once again the market jumped so sharply that it left itself nowhere (meaningful) to go. The potentially-disruptive force in our analysis of the current situation is the looming advent of earnings season, which is going to force investors to deal with the nagging valuation problem I've been on the soapbox about for a while. Yes, that's my not-so-smooth way of letting you know today's the day we're going to give you our Q4 earnings preview, and talk about all the ramifications of the predicted numbers. Let's just dive in, shall we? A Q4 Earnings Season Reality Check As of the latest look from Standard & Poor's (from December 31st), the S&P 500 is projected to earn $30.51 per share for the fourth quarter of 2014. That's an 8% improvement on Q4-2013's bottom line of $28.25 per share. I'd be shocked if the market didn't reach or even exceed the relatively low target. In fact, I suspect it's a bit of a setup for a big "beat", as 8% growth is the weakest growth rate we've seen [with the exception of an anomalous Q1] since the second quarter of 2013. It also compares oddly unfavorably with earnings growth expectations for all four of 2015's quarters; each is expected to show double-digit profit growth. While there's a near-term upside to topping estimates, I don't think investors are going to be bamboozled for very long. Even if we top estimates with, say a 9% growth rate, it investors should soon realize the overall growth rate is starting to slow. The bulls will be quick to counter with a projected upturn in earnings for this year. According to Standard & Poor's data, the S&P 500's bottom line should expand by 12.2% in 2015, after falling to only 8.8% growth in 2014. My only question for the folks making that argument is, where's that extra 3.4% worth of growth going to come from? There are some reasonable answers worth debating, not the least of which is annualized Q3 GDP growth of 5.0%. I'd even go as far to say the employment trend has been persistently decent long enough to really get consumers back in a spending mood [though we'll have a better idea about this after tomorrow's employment update from December]. I'll also remind you how the capacity utilization and industrial production trends - already in decent - picked up the pace again in November. Still though, 12.2% growth is a big expectation for the latter stages of an economic expansion and bull market. With that as the backdrop, I'm mostly on the lookout for downward revisions of 2015's numbers. My other concern is the market's valuation. With a Q4 profit outlook of $30.51, the S&P 500 is trading at a trailing P/E of 17.66 and a forward-looking P/E of 15.74. We've seen worse, and even survived worse. We've rarely seen the index move and stay above a trailing P/E of 17.7 though, and 18.0 is almost unheard of for any length of time. Point being, there's not a lot of room left for upside at our current valuation, even if Q4's numbers roll in better than expected. The forward-looking P/E of 15.74 is a little more palatable, obviously, but I will let you know that's also well above the normal forward-looking P/E in the low 14's. Some will argue stocks are poised to grow into 2015's earnings over the course of the year. We don't disagree. But, already at or near their maximum value on a trailing P/E basis, there's only room for about 12% growth from stock prices this year, and that's assuming corporate America reaches its relatively lofty earnings growth expectations. We'll be updating you with the occasional Q4 earnings season report card over the next few weeks. We just wanted to give you the complete primer today so you could hit the ground running with things get rolling next week. It's Not the Ideal Breakout, But... The market jumped sharply on Thursday, clearing some key technical hurdles it didn't manage to move past on Wednesday. As is so often the case, though, the bulls may end up being their own worst enemy, via their inability to temper their buying to a sustainable pace. Translation: Yet again, the market jumped too far, too fast, forcing too many would-be buyers to remain on the sidelines, fearful the strong 1.8% advance on Thursday after Wednesday's 1.1% gain is simply going to invite some knee-jerk profit-taking. This morning's opening bullish gap exacerbates the problem, even if it is only a psychological one. Take a look at the NASDAQ Composite to see what we mean. It was a strong thrust, carrying the composite above the critical 20-day and 50-day moving average lines. But, the bounce over the past two days looks suspiciously like the bounce from mid-December, which ended up crumbling under its own weight by the end of that month. The other red flag associated with this bounce effort.. mediocre volume. It could be worse, to be sure, but it could be - and should be - much stronger if we're to really trust the effort. Before you assume the absolute worst, though... While the near-term market just established some serious problems for itself, I have to let you know the Russell 2000 Index (of small cap stocks) moved back above a key line in the sand at 1190 today. It also gapped higher, and as such will likely be pressured lower again within the next few days to fill in the gap. All the same, we can presume from this chart that traders aren't afraid to forge ahead to - or back to - aggressive levels. It'll be very telling to see how the Russell 2000 responds to a bearish pushback. If the gap is filled and then the bulls take charge again and move back above 1190 after weeks of consolidation right above all of its key moving average lines, the market could get days if not weeks' worth of bullish mileage out of that. My near-term expectation is still a bearish one based on the terrible start to the new year, the aforementioned valuation challenge, and the likelihood that a small pullback from here [just one intended to close the gaps] would be interpreted as the beginning of a more substantial pullback. However, there's no denying the bulls had the momentum as Thursday's closing bell rang. Never fight the tape, you know? As has been the case for a while, handicapping the market is a day-to-day exercise in this environment. That's why you'll want to keep checking back in every day, probably all month long. By the way, don't forget December's employment numbers will be posted before the market opens Friday morning. They'll undoubtedly be market-moving, so be sure to keep your eyes peeled. We'll have our usual "rest of the story" in the afternoon, but we won't be able to get you the full 411 until after the market closes.