Happy days are here again? Really?

The market rally is starting to turn ridiculous and sublime. Investors now think the worst is over for banks and that consumers are spending freely again. Huh?

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By Paul R. La Monica, CNNMoney.com editor at large

Does Wells Fargo's outlook signal the start of a bank recovery?
  • Yes
  • No
Stocks have been nothing if not volatile in 2009. Bears ruled the day up until early March, but the bulls have come back with a vengeance since then.

NEW YORK (CNNMoney.com) -- I don't want to necessarily say that investors were displaying a bit of good old-fashioned irrational exuberance Thursday following Wells Fargo's projected results.

But what the heck. I just did. This rally is a bit overdone.

Don't get me wrong. Loyal readers of this column (whether you love me or hate me) know that I've been saying for some time that stocks are probably oversold and that we may be closer to the bottom of the downturn than the beginning.

But the worst is not necessarily over for the banking sector. So the huge rally for the entire group, and the broader market for that matter, is a little silly.

Wells Fargo (WFC, Fortune 500) is one of the best run banks in the country - if not the best. The fact it was able to do well in the first quarter should not be a surprise. Nobody was predicting that it would post a loss in the first place, and the bank has reported better-than-expected results throughout the past year.

Those who were ganging up on the stock because they figured Wells would be the next Citigroup (C, Fortune 500) or Bank of America (BAC, Fortune 500) were in for a rude awakening this morning.

But there are scores of other banks that will still face a challenging year, as cash-strapped and debt-ridden consumers -- especially those who lose their jobs -- face problems paying their bills.

"The more you see unemployment rise, the more you have to think that could hurt financials. Many unemployed people have credit card debt, student debt and presumably a mortgage. Concerns about commercial loans are also still hovering around banks," said Quincy Krosby, chief investment strategist with The Hartford.

Investors appear to be making the classic mistake of assuming that, just because a leader in a sector is doing well, it's good news for the whole group.

That's not how markets work. Some companies do well at the expense of others. Wells may be a banking winner but there are still many losers out there.

To that end, SVB Financial Group (SIVB), a bank based in Santa Clara, Calif., said Tuesday it was going to post a surprise first-quarter loss due largely to a higher provision for loans that may go bad.

And analysts expect regional banks such as Comerica (CMA), SunTrust (STI, Fortune 500), Zions Bancorp (ZION) and KeyCorp (KEY, Fortune 500), to name a few, to report losses in the first quarter, second quarter and for all of 2009. Yet, shares of Comerica gained nearly 20% Thursday while the other three banks were up more than 25%.

"Other banks will likely have to create larger reserves. You have to think there are more time bombs out there and that this is far from over," said Phil Dow, director of equity strategy with RBC Capital Markets in Minneapolis.

Comeback for consumer spending?

What's going on with retail stocks is another aspect of the recent rally that is curious at best.

Wal-Mart Stores (WMT, Fortune 500) reported Thursday that same-store sales rose 1.4% in March. While that was lower than what analysts had hoped for, the company also said that it still expected profit for the first quarter would be toward the high-end of its range of 72 cents to 77 cents a share.

So what did the stock do? It fell 4%.

Meanwhile, shares of retailers that continued to report declining sales, such as Target (TGT, Fortune 500), JC Penney (JCP, Fortune 500) and Gap (GPS, Fortune 500), all rose Thursday simply because their same-store sales didn't fall as much as expected. JC Penney is still expected to report a quarterly loss, but its stock was up 12.5%.

Then there's Bed Bath & Beyond (BBBY, Fortune 500). The company reported sales and earnings that were lower than a year ago late Tuesday. But the stock surged 25% Wednesday because both revenue and profit beat forecasts.

Some have been quick to dub the fact that sales aren't falling as much as expected as signs that the consumer is once again confident to start spending more freely.

But that may be overly simplistic. Haag Sherman, managing director with Salient Partners, an investment firm based in Houston, said it is a mistake for investors to use one company's results as a proxy for the whole group.

For example, he said a big reason why Bed Bath & Beyond had a better quarter probably had more to do with the liquidation of one of its top rivals and not a sudden boost in consumer spending.

"Is the consumer coming back, or is it that Linens 'N Things is going out of business? People aren't discerning right now," Sherman said. "Investors are picking and choosing pieces of the news to support buying."

Of course, it's encouraging that investor sentiment has finally started to shift from despair and doom to optimism and renewal.

"This reprieve in selling is an indication that the market is poised to receive any glimmer of hope in a positive light," said Krosby.

But the pendulum has swung too far from excessively negative to unreasonably positive. Just as investors were probably too bearish in the post-Lehman Brothers panic last fall and earlier this year, they are now probably too bullish in the Wells Fargo-induced euphoria.

That's why investors need to focus on identifying individual companies that can be winners, and not assume that everyone is poised for better times ahead.

"The market is looking for reasons to go up," Sherman said. "But earnings, for the most part, are going to be horrific. There's no way around that. You have to look more critically at each company."

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