Despite the recent rally, not much has changed with monetary policy – the Fed remains on a tightening campaign which should be bearish for stocks. According to the Fed Futures, the market is betting that the Fed will continue raising rates.
In addition, this rally could have been caused by a temporary injection of liquidity by the Fed after the London attacks. The Fed sets the target Fed Funds Rate at its monthly or bimonthly meetings but it actually has to buy and sell short term securities daily to move the rate towards its target. Often, the Fed overshoots or undershoots the target rate which causes a differential between the actual and target rates.
Since the Fed began its tightening campaign it has actually been tighter than the Fed Funds Target would imply. However, on the day of the London attack, the Effective Fed Funds Rate came down to 3% from the target 3.25%, indicating the Fed was trying to inject liquidity into the market. That extra liquidity might have found its way into the stock market and caused the recent advance. However, if you’re bearish, you’ll notice that the Fed is back to its "tighter than the Fed Funds Target would imply" policy. That would imply the extra liquidity which juiced the market higher will now be withdrawn and cause the market to fall back.
