The Dow Jones Transportation Average is now showing some real strength around the 4,500 level. This important index got hammered quite significantly. It dropped about 1,000 points since the beginning of July and you can see this in many of the railroad stocks that dropped like a stone when the broader market began to correct.

This index is only about 160 points away from achieving its 50-day simple moving average and this is another illustration of the resilience of the stock market. Several of the large railroad companies look like good values in this market and their yields are becoming quite attractive. Like the rest of the market, however, expectations for the future have been reduced. You’ll find that virtually all of the North American railroad companies have seen a reduction in Wall Street’s earnings estimates, this year and next. For quite some time, the railroad stocks were really leading the broader market. Now they are consolidating after the market’s correction.

It is difficult to be a buyer of stocks in this market, whether it’s for short-term speculation or long-term investment. The earnings picture is still looking decent for the bottom half of this year. But, without the expectation for growth in gross domestic product (GDP) in the first half of next year, it’s difficult to imagine much in the way of capital appreciation in share prices. This is why so many investors are sitting on the sidelines. There isn’t a lot of reason to be a buyer of equities, other than for yield if you’re a long-term investor.

I know lots of retirees who are not expecting much of anything from their equity holdings other than their quarterly dividends. Ever since the subprime mortgage meltdown and the stock market’s almost total collapse, a lot of individual investors have chosen not to participate in equities and this is why cash balances in brokerage accounts have been skyrocketing. Bonds and money market funds pay very little and the stock market’s been extremely volatile. It’s certainly no surprise that investors (and corporations) have been moving to cash. There’s not much out there other than investing in real estate and expected returns in this sector have also been dramatically reduced.

The common theme throughout the recent financial crisis and the current state of things is debt. Whether it’s mortgage debt, personal debt, or national debt and deficits. Economies, countries and individuals are experiencing their own consolidation of finances and, without question, this will adversely affect economic growth in all Western economies. We very well could be in a slow GDP environment for the rest of this decade.

Importantly, I believe that policymakers should take a hands-off approach in trying to manage the economy and thereby let the system correct itself over time. The hands-on approach would be helpful in getting a firm hold on sovereign finances. Naturally, less debt-induced government spending would adversely affect Main Street economic growth. But, short-term thinking has only proven to put us in the current pickle that we’re all experiencing. It’s time for some thoughtful, long-run austerity to get the entire system back to solid footing.

Global stock market investors want short-term monetary action from central banks, but, at the end of the day, this kind of thinking is a big part of the reason why we’re in the current bind.

The railroad companies have confirmed that the industrial economy is on track for a solid second half. They are buying more equipment to deal with increasing load factors and most are planning to hire new workers to keep up with rising demand for their transportation services. This is a very good indicator for the future.

One of the big companies, CSX Corporation (NYSE/CSX), reported record second-quarter results with earnings coming in at $506 million, or $0.46 per share, compared to $414 million, or $0.36 per share, in the second quarter of 2010. This was a 28% gain in an environment of rising costs for raw materials. Company revenues grew 13% to $3.0 billion and management cited increased business activity in all major markets, including merchandise, intermodal and coal. Revenues were driven by volume growth and higher prices, which offset increased fuel prices.

If you read the earnings reports of all the major railroad companies (which I highly recommend), you’ll notice that they are all saying the same thing.China’s appetite for coal is a major contributor to business growth in rail transportation. Growth in utility demand at domestic power plants is lackluster, but sending coal to Asiais a new bulkhead business that’s keeping the industry solidly profitable.

Yet, for all the success that’s on the books, the stock market doesn’t seem to be celebrating the good earnings (and visibility). It’s as if the market is just plain grumpy and unsure of itself. The Dow Jones Transportation Average isn’t really saying anything with its recent performance. The Index is trading at the same level it was in April and May. It bounces around, of course, but there’s no technical trend that jumps out at you.

I suppose the stock market reflects the mood of the economy. Some parts are doing okay, while others struggle. Stock picking in this kind of environment is much more difficult, because there is no wind at your back. It is a very good sign that the railroad companies are saying that things are good and they are shipping more coal and chemicals. Following this specific industry is an excellent way to get a feel for the industrial economy and to develop your market view.

My feeling is that we’re going to be stuck in a period of mediocrity for several more years as the whole of the economy continues to balance itself out after a major period of excess and correction. The stock market should reflect this mediocrity and continue with its trendless price moves. This is why I like higher-dividend-paying blue-chips and some gold on the side for protection. Not much else is paying in this market.

 There are a lot of bellwether companies to report over the next couple of weeks and the trading action in stocks will be focused on that news. I still don’t think that this earnings season has been anything to write home about. For a number of large-cap companies, the earnings have been solid, but there haven’t been any grand slams. The fact is that this economy can’t produce much in the way of outperformance, with the possible exception of gold stocks.

Railroad stocks are still looking great in this market and that’s always a good sign that general economic activity is getting better. The railroad companies operate like the accounting concept: first in/first out. They see improved economic activity first and they see it go just the same. The major railroad stocks are trading just off their price highs. CSX Corporation (NYSE/CSX) just reported a 30% improvement in earnings, as freight volumes increased. Street analysts already raised their earnings guidance for the company’s second, third and fourth quarters, all of 2011 and 2012. If you want to know where the broader stock market is headed, just follow the railroad stocks.

Investing in gold and other precious metals continues to pay off regardless of what’s happening in other sectors of the economy. The new $7.8-billion bid by Barrick Gold Corporation (NYSE/ABX) for copper producer Equinox Minerals Limited (TSX/EQN) is the latest big acquisition in the mining business. Equinox Minerals has been a powerhouse moneymaker. The stock did very well over the last 10 months, and then pulled back with copper prices. Then, a Chinese company made an unsolicited bid for the company, but the Street figured that another, friendlier bid would surface (and rightly so). The stock traded well above its original takeover price and now the trade is over.

You can bet that, with gold prices and silver prices trading right at their all-time price highs, more mergers and acquisitions will be coming. This sector in my view remains perhaps the most attractive for equity speculators in the current environment. And this is knowing that most of the good gold stocks in that universe have already gone up. With mining companies almost drowning in cash, they have nowhere else to put this excess cash flow but to purchase other miners. I can almost see the investment bankers drooling over the prospects of more deals coming down the pipeline.

I do feel that the equity market looks tired and that a correction or meaningful consolidation is increasingly likely after first-quarter earnings season is over. As I’ve written recently, investors don’t need to be in a rush to take much action in this market. Things look like they’re topping out.

Even the most seasoned institutional equity investor is asking him or herself, “…so now what?” There really is a lull in the equity trading action and volume is low. We’re not quite into first-quarter earnings season and corporations aren’t saying much. The economic data are mediocre at best and the stock market has already gone up tremendously. So, it really is a time when everyone is wondering what’s going to happen next.

The good news is that corporations are expected to do quite well in the first quarter. That’s the expectation and we have no reason to believe that they won’t deliver. The stock market, in my view, has about one more quarter of courtesy left in it before investors really start to get cranky about the economic data. The stock market has gone up over the last seven months specifically because of strong expectations for corporate earnings. That’s fair; but it isn’t sustainable unless the economy begins accelerating. This is why a lot of investors aren’t doing much in this market; because they don’t know what to do—the unknowns in the economy are very real.

The key to the stock market’s trading action going forward will be the transportation sector. The Dow Jones Transports Index has been struggling lately, but I think it has a good chance of reaccelerating in the not-too-distant future. Business for the railroads is strong and they remain one of the best barometers for economic activity, even as housing prices remain in the doldrums. Follow the railroads and retailers and you’ll have a good sense as to where stock prices should go over the coming months.

Now is the time for corporations to show their stuff. Investors have already bid up share prices with the expectation for strong earnings, and companies had better deliver. In fact, the stock market won’t be able to advance much higher if companies don’t beat consensus estimates and improve their guidance. That’s what the stock market is all about—increasing expectations for the future. Without an improvement in guidance, the marketplace will likely sell off for quite a while.

It’s actually quite tough to be a new buyer of stocks at this particular point in time. It’s awfully risky taking on a new position without having a company’s latest financial report to go on. This always happens before a quarter closes and it contributes to the malaise in the marketplace.

Both stocks and commodities continue to be due for a correction. In my view, a meaningful correction would be a healthy development for the market this year. I don’t know if we’ll get one, but I would plan for one. The worst thing you can have is a stock market that just keeps going up. It makes the fall that much more painful.