Wall Street Loves Bad Banks, but You Shouldn't

These weren't stress tests. This was stress therapy.

The main purpose of this exercise wasn't to see whether banks could cope with an economic downturn. It was to calm investors' nerves. They were in panic about six weeks ago, when markets, and the economy, appeared on the brink.

That's why the Fed made these tests so easy. Their "worst case scenario" for the economy was actually rosier than some current forecasts. Half the banks flunked anyway, but nobody seems to care. Bank of America is short about $35 billion? Oh, mark those shares up 300%.

Almost anything is better than the unknown, which is what was spooking everybody two months ago.

Seems Wall Street is back in its happy place again. Banks and other highly leveraged stocks have skyrocketed. Fund managers, many of whom have come late to the rally, are now worried about "underperforming" before their next quarterly review. So many are now madly rushing to buy the riskiest stocks they can.

What does this mean for you and your money?

Don't worry about momentum and action, and don't worry about bank stocks. They may be cheap for all I know. But they are impossible to value with any degree of confidence. And who cares? The single greatest realization that hits every investor, and every poker player, is the same. You don't have to bet on every hand. Nine times out of 10, the right move is simply to sit it out.

While everybody is talking about the banks, they are missing something that looks far more interesting and useful. Many top quality defensive stocks have been left behind in this market rally. Companies like Kellogg's. People are going to keep eating corn flakes in good times and bad.

Defensive companies often get left behind in a fast short-term bounce. But over the long term, solid, steady companies have usually provided investors with better returns.

Many of these kinds of stocks have rallied little from their lows. No one is excited about defensives because there is no "action" there and they are not a "recovery" play. They will not help fund managers meet quarterly numbers. These just look like good companies at pretty reasonable valuations. And who, in this mad rush, could possibly be interested in such a thing?