What Really Drives the Stock Market

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By James Helliwell, Chief Investment Strategist

Hello traders

I hope you’ve all had a good week!

As April draws to an close it has been yet another good month to be long stocks, with the S&P 500 having gained over 5% during the period. It often makes me uneasy looking ahead to new month following such strong performance, as the cynic in me assumes that the good times won’t last forever! With that said, it is important to remember that record highs in the stock market (on a monthly closing basis) are more often than not followed by successive new records. But rather than relying on anecdotes and superstition, we should refer again to our trusted process.

We updated our Checklist Report for May earlier this week, with immediate access available to Trading Club members. Whilst I cannot reveal too many of the scores here just yet (out of consideration for our subscribers) I would like to share a couple of the Checklists which give me plenty of reason to be optimistic as the new month gets underway.

Its all too easy to get caught up in the narrative and short-term market sentiment, and seeing the ‘big picture’ is key when it comes to being correctly positioned in the stock market. Don’t forget that the stock market (at least in the long run) should reflect the level of corporate earnings, which are mostly influenced by the phases of the business cycle. If you own stocks then you should certainly be hoping for signs of expansion in the economy.

Here’s our Business Cycle Checklist which helps us to determine just that. With a score of +4, the outlook appears very positive. Furthermore, Trading Club members will note the marked improvement from a level of +1.5 which had been tracking for some time.

So not only is the Checklist at a healthy level, but it is also improving. Here you can see the relationship between corporate profits (grey line) and the stock market (green line) which follow a clear cycle (the business cycle), as I explained earlier. With the economy expanding (and earnings rising) the long term outlook for pro-cyclical assets looks to be positive.

Looking to the stock market more closely, we can see that our US Equity Checklist is also stacked positive, confirming our assessment of the Business Cycle. This provides even greater conviction in the idea that the latest record high in stocks should not to be feared, and should actually herald further gains in the month ahead.

So whilst the S&P 500 may appear ‘overbought’ according to the RSI, where there is also some negative divergence potentially forming, it seems more likely that the bull trend will continue towards a projected Fibonacci retracement target of 4350 (261.8% extension level) during the course of next month. Of course, nobody can predict what the market will do day-to-day and we may see a purely technically-driven correction in the meantime, but everything else seems to point to the path of least resistance higher from here.

Only time will tell how this all plays out. We are of course in the thick of earnings season now, with many of the US companies that I hold in my portfolio reporting some really interesting numbers. If others can emulate the blow-away results from the likes of Google, Microsoft, Facebook and Apple this week, then it should confirm what our process has identified in terms of the business cycle expansion driving corporate profits, and ultimately, the stock market higher.

To learn more about our methods, and join me for more analysis in real-time, check out our MDT course and Trading Club pages where you can preview everything that we cover.

In the meantime, why not head over to our YouTube Channel for our latest FREE videos which I will be bringing to you each week in 2021! As there’s no charge for this content, it would be great if you could support the channel by leaving a comment and subscribing.

Have a great weekend,


Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information.

© Copyright 2021 Lex van Dam Financial Education. Further distribution prohibited.

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