Carlo Ancelotti says Everton will get a true measure of their improvement when the surprise Premier League leaders face champions Liverpool on Saturday.
Ancelotti's side have reeled off four successive wins in a perfect start to the season.
But the Everton manager knows this weekend's Merseyside derby at Goodison Park will provide the acid test of their resurgence.
Everton have not beaten Liverpool since 2010 and finished 50 points behind Jurgen Klopp's men last term.
Liverpool suffering a humiliating 7-2 thrashing by Aston Villa just before the international break, a result that emphasised some flaws in the Reds' defence.
Despite that shocking loss and some other defensive blunders this season, Liverpool still represent the gold standard in Ancelotti's eyes.
"I think it will be good for us to have this kind of test. They are the best, they were the best last season and one of the best teams in the world, so it's a fantastic challenge," Ancelotti told reporters on Friday.
"The message for us is they are going to have an exciting game, it's a derby. Be confident and be happy to play this game.
"I think the feeling in the dressing room is good. We've started really well, we know it will be a fantastic challenge."
Everton are three points above Liverpool and for once have the upper hand going into the derby, leaving fans dreaming of the period in the 1980s when the local rivals slugged it out for the title on a regular basis.
Klopp is a long-standing admirer of Ancelotti after his success with Chelsea, AC Milan, Real Madrid and Bayern Munich.
And the German believes Everton are capable of sustaining their early-season success long enough to emerge as title contenders.
"I want to say thanks to him, to be a challenger for Liverpool could be really good for us," Ancelotti said of Klopp's compliment.
"Of course Liverpool is doing so well. We are, I think, not so far but still far from them. We can have a good test tomorrow against them to see how far we are."