How To Know Where Stocks Are Heading Next

After the best May in 35 years, the US stock market has started June slowly.

Some traders are already talking about a "summer stall," while others expect the rally to continue reaching new all-time highs.

Having traded since the late 1980s, I've seen it all. But I've boiled the financial markets down to five core benchmarks that tell me everything I need to know.

There's so much financial news to keep tabs on right now – the ongoing trade war, interest rates and the tug-of-war between the Fed and Executive Branch, earnings, gold, oil, bellwether stocks like the Magnificent 7 (to say nothing of the other 8,000 optionable stocks in the market), and so much more.

But the truth is, 90% of the chatter around the financial markets is simply noise—a distraction from what's happening beneath the surface – and the best opportunities to profit.

So, the question is: How do you cut through the noise and focus ONLY on what matters?

In my more than three decades as a trader, I have boiled the financial markets down to just five core benchmarks.

These are what I call the Five Points of the Market – the five asset classes that drive the markets every single day:

• Stocks
• Bonds
• Commodities
• Currencies
• Crypto

Now, this is incredibly broad. And it might sound like a lot to keep up with.

You're not wrong! In fact, these five asset classes represent the entire global economy: the $124 trillion stock market, the $140 trillion bond market, the $2.7 trillion crypto market, and so on.

You get the idea.

However, each asset class can be tracked by looking at a single benchmark and applying just a few basic trading concepts to how you interpret the data.

Today, I want to ensure that you can use this information to help you make the smartest—and most profitable—trading decisions.

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Five Benchmarks to Use to Decode the Markets Every Day

As I said, I keep tabs on the market by watching the five most powerful asset classes: Stocks, Bonds, Commodities, Currencies, and Crypto.

But those markets are vast, complex, and worth trillions. So, I use some of the biggest, most liquid instruments to track these massive markets.

Stocks: SPDR S&P 500 ETF Trust (SPY)

The S&P 500 Index is the most watched economic indicator in the world. The health of this group of stocks is seen as the benchmark for the entire universe of over 8,000 stocks.

Now, I'm not really interested in monitoring 500 stocks every day (I only really like 370 of them anyway).

The SPDR S&P 500 ETF Trust SPY is an exchange-traded fund that tracks the performance of the S&P 500 Index. It is the most liquid security in the financial market.

SPY gives me a picture of the overall stock market. In one glance, I can tell you short-, medium- and long-term trends impacting the day's trading, not to mention what to look out for in the coming days.

SPY is a great way to gauge the health of the overall stock market. Its liquidity makes it an easy way to buy or trade the market.

Analyzing SPY also reveals the market's most powerful seasonal trends. November to April is the "best six months" seasonal pattern (with April being the strongest month for stocks overall). September, meanwhile, is the weakest month. These historical seasonal trends are important to consider against current market trends and data.

Bonds: iShares 20+ Year Treasury Bond ETF (TLT)

iShares 20+ Year Treasury Bond ETF TLT is an exchange-traded fund that seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than 20 years.

This gives us an excellent snapshot of the $140 trillion bond market.

TLT is an economic indicator that can serve as a leading indicator for the inflation outlook.

Longer-term bonds (like those with 20+ years until maturity) generate a yield curve – rates usually rise right along with the time horizon.

Long-term bond yield is reflective of future inflation, so it rises as TLT increases.

Commodities: SPDR Gold Shares (GLD) and the United States Oil Fund LP (USO)

Now, I don't need to monitor the thousands of commodities that make up the over $20 trillion commodities market.

That's because things like cobalt, lumber, and coffee don't really matter to the overall economic picture – and they certainly don't influence traders' decisions unless you specialize in trading obscure cobalt futures.

That's why I keep my focus on the only commodities that really drive markets: gold and oil.

For gold, I track SPDR Gold Shares GLD, an exchange-traded fund designed to track the price of gold. Rather than using derivatives to track gold, GLD is backed by actual physical gold, including 400-ounce London good delivery bars held in the HSBC Bank vault in London.

Why is the price of gold important? Well, gold is usually inversely correlated with the value of the U.S. dollar, and it's considered a safe haven during market turbulence. Many market experts (myself included) will tell you that exposure to gold is still a great hedge for any portfolio.

If I'm seeing signs of trouble in the stock market, a rise in the price of gold, as reflected in GLD's price, may indicate that traders are loading up ahead of a pullback or a correction.

Meanwhile, to track the oil market, I use the United States Oil Fund LP USO. USO tracks the price of West Texas Intermediate (WTI) light, sweet crude oil by investing in futures contracts, and it can be a great short-term vehicle for trading oil.

Of course, rising oil prices could indicate increased demand due to economic expansion. Plummeting oil prices, meanwhile, can indicate an economic downturn.

Oil and gold both have seasonal patterns that occur throughout the year, and we pay close attention to both.

Currencies: Invesco DB US Dollar Index Bullish Fund (UUP)

The U.S. dollar is the world's reserve currency and the most-watched currency in the world.

A strong dollar can negatively correlate with stocks. Over the last several years, when the dollar has surged, stocks have fallen.

So, I like to monitor Invesco DB US Dollar Index Bullish Fund UUP for signs of a strengthening or weakening dollar to help inform my trading.

For example, if we're in the middle of a seasonal bear pattern and the dollar is getting stronger, that could give me additional confirmation that a bearish stock or option trade is the way to go.

Likewise, if the Money Calendar predicts a bullish week and we see weakness in the dollar, it may be time to go long.

Crypto: Bitcoin (BTC) and Ethereum (ETH)

Bitcoin (BTC) is the world's first and largest cryptocurrency, representing nearly 60% of the $2.7 trillion crypto market.

It's the number one indicator of the health of the crypto market—when Bitcoin is going up, bullish sentiment takes hold and spreads to thousands of smaller coins. When Bitcoin consolidates sideways, the entire market follows suit. When Bitcoin crashes, the market enters what we call a "Crypto Winter."

You get the idea. If you want to successfully trade the crypto market, you've got to pay attention to Bitcoin.

From time to time, we'll also take a look at Ethereum (ETH).

Like every other asset class I track, the crypto market is subject to seasonal patterns and regular cycles, just like stocks.

Money flows first into Bitcoin, then Ethereum, and then into smaller, more speculative altcoins.

So when Ethereum is outperforming Bitcoin, we like to track it because it can help us uncover those big, fast gains in the altcoin market, the kinds of coins I trade for 1000%+ gains.

Next week, I'll break down exactly what the charts are signaling as we head into summer and discuss the top stocks currently on my radar.

Editorial content from our expert contributors is intended to be information for the general public and not individualized investment advice. Editors/contributors are presenting their individual opinions and strategies, which are neither expressly nor impliedly approved or endorsed by Benzinga.

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