What does "Literary canon" mean?

It's the important, influential books that lead literary trends.

The "literary canon" is like a pantheon of the important authors and their works. These are the authors (usually dead) who are studied in schools and recognized for their literary merits.

Mark Twain and Charles Dickens, while certainly popular, weren't considered to be literary heavyweights in their lifetimes and were still considered to be only marginally marginally important as recently as the 1930s, when my father was in high school. Now they practically define the literary canon. When I was in high school in the late 70s, JRR Tolkein was kind of a fringe literary figure primarily of interest to Trekkies and comicon habitues. He's the object of serious study now.

It's pretty hard to predict who will get into the exclusive club of important writers. The smart money thirty years ago would have been on Gore Vidal and Jerzy Kozinski getting the nod, and Jim Thompson and Charles Bukowski not; quite the opposite happened.