(FORTUNE Magazine) – Even after she'd seen the numbers, Elizabeth Mackay had no inkling of the tidal wave that was about to hit. To Mackay, the chief investment strategist for brokerage giant Bear Stearns, the producer-price statistics released on the morning of April 11 hardly presaged panic about inflation. So much, though, for the opinion of experts: Within minutes of the opening bell on Wall Street, the Dow index was off 50 points and the New York Stock Exchange had imposed trading curbs to limit the damage. Mackay was deluged with worried callers seeking solace and understanding. The pink message slips piled up.

And then, just as suddenly as it began, the pounding stopped. After losing 150 points that day--among the Dow's worst ever-- the market snapped right back, jumping 60 points the following trading session, 135 the one after, 90 points the one after that. What in the world was going on? At the very moment that doom and gloom seemed poised to overtake Wall Street, the incredible bull market had regained its stride--at least for now.

That's the way it's been so far this year: scary slides, euphoric jumps, unpredictability at every turn. "For the last three weeks, the Pepto-Bismol and the Mylanta have been flying off the shelves," says the manager of a large pharmacy down the block from the New York Stock Exchange. "People's stomachs are jumping up and down just like the market."

Is there any way to make sense of it all? If even the experts seem confounded, how are individual investors supposed to figure out what to do? There are many reasons for today's turbulence--fears of inflation, uncertainty about earnings, panicky mutual fund managers who jump out of stocks at the first whiff of trouble. And the high valuations on many equities only add to the anxiety.

The world of mutual funds--supposedly safer than individual stocks because of diversification--is just as tumultuous. "Is it time to jump out the window?" asked one client of Eleanor Blayney, a financial adviser in McLean, Virginia, in early April. Harold Evensky, a Miami portfolio manager with 200 clients exclusively in mutual funds, recently sent out letters warning that "we could be on the verge of a bear market." No wonder Wall Street insiders are reaching for the Mylanta.

Let's say it clearly: No one knows where the market is going-- experts or novices, soothsayers or astrologers. That's the simple truth. What we do know is that we've gotten conditioned for this market to rebound--to be rewarded for aggressiveness and risk taking. The sharp drop in early April, though, should serve as a wake-up call for the complacent, a reminder that stocks do go down. While we're not advocating bailing out of the stock market and hoarding cash, it is time to consider adding ballast to a portfolio: positions with some defensive characteristics that could protect you in a downturn.

Of course, we also don't want to give up the prospect of enjoying gains. So we set out to find investments that should help shield investors from big drops in the market while allowing you to profit from any big upside moves. Our search was made more difficult because the traditional refuges investors turn to in times of trouble don't seem so safe these days: blue-chip issues are sporting price/earnings multiples that would put some highflying tech stocks to shame (Coca-Cola at 35, Gillette at 30); utilities are being rocked by new competition in an increasingly deregulated marketplace (after a subpar performance in 1996, the sector is down about 10% so far this year); and the recent favorites of nervous investors, real estate investment trusts, have run up so much that it's unclear whether they will provide the kind of buoyancy they have in the past. (In the two-week period ended April 11, the Morgan Stanley REIT index fell 4%--nearly as much as the S&P 500's 5% loss.)

But there are other options. To identify areas of opportunity, we spoke with leading value investors such as Marty Whitman of the Third Avenue Value fund and Michael Kassen of Neuberger & Berman, and picked the brains of strategists like Michael Metz of Oppenheimer and Bob Stovall of Stovall/Twenty-First Advisers. At the same time, a team of FORTUNE reporters searched for promising ideas the pros may have overlooked. Finally, we ran our picks by leading industry analysts, vetting them for lurking balance-sheet problems or ugly earnings surprises.

The final result--which includes more than a dozen specific recommendations--is separated into six different strategies that we believe will help you profit no matter what the market does next. They carry varying degrees of risk: our technology and international picks are obviously chancier than the bonds and preferred-stock recommendations we're making. Nonetheless, while they weren't chosen with the idea of doubling your money overnight, they should provide a way for you to put new money to work or reinvest any profits you may have taken recently.

One last thing: In addition to our six recommended groups, you'll also find three boxes on investment ideas that we were intrigued by--gold stocks, Japanese exporters, and specialized, supercharged index funds--but felt were too risky to endorse. You'll notice no diversified mutual funds mentioned here. That's by design. In the kind of broad market downturn that we all really worry about, broadly configured funds--especially index funds--will suffer sharply. We've tried to make individualized suggestions that we hope would hold up better. The stock prices and yields listed are as of April 15. Now, on to the picks.

1. EXTREME VALUE

Once upon a time, stocks that sold at low P/Es were universally touted as good buys. Somewhere along the line, though, growth at any price became the mantra and an absurdly high P/E became a sign of investor confidence, not market froth. That's changed, now that many of these so-called momentum stocks are trading at a fraction of their 52-week highs. With this in mind, we think investors will soon come to appreciate low P/E stocks again--especially if they boast rising earnings, a rich dividend, a secure position in their industry, and plenty of cash. Two of our picks in this group, Philip Morris and Ford, easily meet all four of these criteria. The dividend on our third choice, Intel, is tiny, but the company's market position is so strong and its recent selloff so overdone that we think it belongs in the extreme-value category rather than in our tech group. These three carry limited risk right now as well as the potential to fully participate in any market rally.

For investors undeterred by the morality of owning a cigarette maker, it doesn't get much better than Philip Morris. Sure, there's been some volatility over the past year, but Big Mo (Philip Morris's ticker symbol is MO) dominates its industry, has huge growth opportunities abroad, owns some of the best-known brands in the world, and is almost fully insulated from the bumps and jolts of the economic cycle. Yet the stock is trading at a multiple half that of comparable franchises like Coke and Gillette. The company has an enviable return on equity, thick margins, and a ten-year history of earnings growth averaging 17.4% annually. And don't forget the juicy 4% yield. What's more, Philip Morris seems closer than ever to unlocking the value within its stock, with comprehensive settlement talks under way on tobacco litigation. Mutual fund manager Robert Sanborn of Oakmark has estimated that without the litigation albatross, Philip Morris could be worth as much as $250 billion more. Translation: The stock--currently trading at $39 after a recent 3-for-1 split--would more than triple.

So what about Ford? You'd have a hard time finding a growing company with a lower multiple. At a recent share price of $33, the automaker's stock is trading at about eight times this year's earnings, less than half the S&P 500's average. Of course, low P/E ratios for automakers have long been viewed as a signal that the cyclical auto business has peaked and earnings are poised to drop. While that's always a concern, several factors should insulate Ford from any sharp drops while still allowing room for price appreciation.

First, the company's numbers seem to be improving, with tight cost controls helping to generate $1.5 billion in earnings in the first quarter of 1997, more than double last year's numbers and well above Wall Street's expectations. (Profits in the North American auto business were especially good, due in part to healthy demand for high-margin Expedition sport-utility vehicles and F-150 pickups.) Next, there's the issue of how a strengthening U.S. economy would affect the auto industry. Economic growth is now the big fear on Wall Street. But while other stocks suffer if the economy grows too quickly, Ford's business should prosper. Last, and perhaps most important, is Ford's outsize dividend, which was recently increased to $1.68 annually. That translates to a yield of 5.1%, a nice return even if the stock stands still. And the company's strong market position, as well as a large cash hoard, makes the payout a safe bet. All this, says Paine Webber analyst Michael Ward, means limited downside and a share price that could rise 25% within 12 months.

Our final value pick, Intel, has become a household name on a par with Coca-Cola. Yet its stock, at $131 a share, is trading at less than half Coke's multiple, even after a huge run-up during the past 12 months. Tom Kurlak of Merrill Lynch, Wall Street's premier semiconductor analyst, is currently calling Intel a strong buy, estimating fiscal 1998 earnings at $11.20 a share. That would mean a P/E of just 11.7--a value play if there ever was one.

What about Intel's recent plunge on talk of flat sales? According to Kurlak, the slowdown is due to product transition in the company's enormously successful Pentium line: Early Pentiums aren't selling, while more advanced Pentium MMX chips are selling so fast, the company can't make them quickly enough. The company should have additional supplies of the faster chips on the market by the end of 1997, Kurlak says, which will boost sales and the stock price. He predicts Intel will be at $200 a share within 12 months.

Another plus: Intel's stock is set to split on June 2. Why should this matter? Small investors have a history of jumping on stocks once they split, even though the shares aren't any cheaper in real terms. It happened when Microsoft split last December. It could happen again with Intel.

2. TECHNOLOGY VALUE

It hasn't been fun being a tech investor during the past 12 months. After technology stocks surged in the first half of 1996, the bottom fell out last July, hitting small caps and big names equally hard. The big guys bounced back quickly and roared to new highs, only to drop sharply again in recent weeks. Smaller companies, some of which carried nearly stratospheric P/Es a year ago, never recovered, and then got pounded again in 1997. With tech investors especially unforgiving to companies that don't meet outsize earnings expectations, it's enough to make you forswear any stock that has "systems" or "communications" in its name.

We think that would be exactly the wrong move right now. Technology stocks have a history of recovering strongly from market scares--as long as you have the right ones. For now, we're holding off on recommending any battered small caps. They offer potentially huge returns, but catching falling knives isn't our game. Instead we like three larger companies--Cisco Systems, Lucent Technologies, and Analog Devices. The first two share several characteristics: They are big-cap powerhouses that dominate their industries, which should cushion the ride if the recent weakness in tech continues; they have management teams that get high marks from Wall Street, another valuable commodity in an uncertain market; and they enjoy fast-growing sales overseas, which should protect them from any slowdown in the U.S. economy. Analog Devices is a bit smaller and a bit more risky but has greater upside potential.

Cisco Systems' stock rose from the high 40s last April to over $75 a share in January, only to return to the 40s recently. Over the long term, though, this computer-networking giant has been a terrific performer, rising 80-fold since going public in 1990. Networking is among the fastest-growing areas of high tech today, driven by the growth of the internet as well as by the development of corporate intranets. Cisco is the dominant player. Profits are expected to grow by 40% over the next few years, yet the P/E is a mere 24. (For a full analysis of Cisco's capabilities see "Computing's Next Superpower," in this issue.) One caveat: Cisco is set to report its latest results on May 6, and there are rumors they could fall short. Even if they do miss the mark, we think the stock should suffer only a temporary setback. But if you can't stomach the idea of short-term fireworks, don't move to buy until after the earnings numbers come out. Sometimes, passing up the chance to catch an upside earnings surprise is worth the extra peace of mind.

Our second choice in this sector, Lucent Technologies, was the communications hardware division of AT&T before being spun off from the troubled phone giant last April. Since then it's risen from $27 a share to a recent price of $52. Nevertheless, it offers bright prospects for further gains. Lucent should prosper as long-distance carriers like AT&T and Sprint spend billions to upgrade their networks. Moreover, demand from international and emerging-market telecom companies is as strong as business with the Baby Bells here at home. It doesn't hurt that Lucent's newly won independence makes it easier to attract business from AT&T competitors that were reluctant to get their hardware from Ma Bell. Lucent execs are also busy cutting any fat left over from AT&T's bloated management structure. All this makes Lucent's earnings growth easy to predict--"near-term earnings visibility" in Wall Street argot. That's something the pros pay extra for in a tough market, says money manager Ed Keely, who has 265,000 shares of Lucent in his Founders Growth fund. Analyst James Parmelee of Deutsche Morgan grenfell has a price target on the stock of $65 a share.

Our final pick in this category, Analog Devices, definitely carries more risk than the other tech names we've mentioned. So if you're scared by the prospect of a roller-coaster ride, you might want to jump ahead. If you're more venturesome, however, read on. Analog Devices, as its name implies, makes analog chips, which go into a huge range of high-tech consumer products. Those new digital cell phones you keep hearing about require them. So do HDTV sets and digital cameras. It might seem confusing that digital products would need analog chips, since analog technology is sometimes seen--wrongly--as outdated. But only analog chips can convert human voices, images, and other analog data into digital signals.

Analog Devices' products do lack the high-tech buzz of their digital cousins, but we're not interested in flash. We're interested in profits. And as semiconductor analyst Drew Peck of Cowen & Co. points out, a digital cell phone contains analog components with twice the dollar value of the analog chips in a conventional cell phone. What's more, Analog Devices enjoys margins approaching 50%. Peck believes Analog--which at $25 a share trades at 14 times his 1998 earnings projections--should experience a major surge in business as the Christmas season approaches and consumers line up for 1998's hot new tech toys. "We think these new products could generate explosive demand for Analog's chips," Peck says. "Analog's focus on conversion technology could help them break away from the competition the way Intel did several years ago." Peck's price target on the stock: $35 to $40 a share within the next 12 months. If you can afford the extra degree of risk, this could prove a very profitable bet.

3. RESTRUCTURING PLAYS

Companies in the throes of change aren't a pretty sight. Divisions get sold, factories close, executives quit, millions--sometimes billions--are written down. Analysts on Wall Street say earnings are difficult to predict and complain that progress isn't coming as quickly as they had hoped. Money managers and individual investors, scared away by any hint of uncertainty, sell their shares and look elsewhere. All this turmoil, on the other hand, smells a lot like opportunity to us. Some of the best investments of the past few years--IBM, AlliedSignal, and Sears, to name a few--were restructurings or turnaround situations. Of course, not all makeovers are successful or quick (witness Apple Computer). To find our favorites in this area, we studied the biggest restructurings, spinoffs, and makeovers now in the works, looking for three things: a genuine change in corporate strategy; managements that were ready to shed less valuable businesses, not just repackage them; and strong brand names that could be acquired at bargain prices.

Westinghouse matches those criteria precisely. The company's been around since the 19th century--it electrified the Chicago World's Fair of 1893--and achieved success in the 20th century building turbines, nuclear reactors, and a network of radio stations. In recent years Westinghouse has been known mostly for being among the Dogs of the Dow (it was kicked out of the Dow 30 earlier this year). Now, though, four years of turnaround efforts by CEO Michael Jordan are bearing fruit. Jordan, who oversaw Westinghouse's purchase of CBS in 1995, is repositioning the company as a media business with more recent acquisitions such as Infinity Broadcasting and The Nashville Network cable station. Meanwhile, he's spinning off the stodgy industrial businesses that have been hampering profit growth, a deal that should be completed by year-end 1997.

What we especially like here is that with the shares now at $18 and the pending spinoff worth around $4, you're really getting the broadcasting company for just $14. Morgan Stanley's Frank Bodenchak says that this business should earn $1.20 per share on a free-cash-flow basis in 1998, giving it a multiple of only 12. In contrast, Bodenchak estimates that other broadcasting industry names typically trade at 20 times free cash flow. Even with CBS's ratings problems, Westinghouse is a clear bargain. By the end of 1998, with the spinoff completed, Bodenchak thinks Westinghouse shares could rise 40%.

A new chip for the old Block: That's what H&R Block's management thought it was getting in CompuServe, an internet service provider that once seemed as if it could jazz up the Kansas City company's bottom line. Instead CompuServe's efforts to compete head-to-head with America Online backfired, and the unit became a drain on H&R Block's core tax-preparation business. Last year, though, H&R Block spun off 20% of CompuServe in a public offering and is now reportedly close to selling the rest of it.

Although CompuServe is losing millions, analysts estimate its network and customer base could fetch $2 billion, equal to $15 per share for holders of Block stock. Subtracting that from the company's current $31 share price means you get the very profitable tax-preparation and financial service business for only $16 a share. With CompuServe out of the picture, Block could earn $2 a share in 1998, giving the slimmed-down company a P/E of about 8--which will certainly expand. After all, this is a franchise that helped 14.9 million Americans complete their taxes last year--one out of every seven returns filed with the IRS.

And getting rid of CompuServe isn't the company's only shift in strategy. It's now moving into the broader marketplace for financial services, leveraging its brand name to sell products like mortgages and consumer loans as well as financial-planning advice. Plus, it sports a whistle-clean balance sheet with no debt. "I think Block is extremely attractive," says Dean Witter analyst Paul Mackey, who adds that confusion about CompuServe's fate has masked the company's real value. Indeed, the troubles at CompuServe are the main reason HRB is down almost 40% from its 1995 peak. Assuming that CompuServe is sold and the financial service business stays on track, Mackey says, H&R Block shareholders could see a jump of 50% by the end of 1998.

Our third suggestion in this section isn't a restructuring in the traditional sense. Instead, it's an arbitrage play on the conversion of T. Rowe Price's closed-end New Age Media fund into an open-end mutual fund, which is set to happen this summer. Why should this seemingly arcane transaction be a moneymaker? Because the closed-end fund is currently trading at a 7% discount to its portfolio's underlying net asset value, a gap that will close by summer. New Age Media does invest in volatile technology and communications issues, so a stable NAV isn't assured. But if the portfolio holds steady for a few months and the conversion goes through, you make 7% in three months' time--a 28% annualized rate.

One final restructuring worth mentioning: AMR, parent of American Airlines. No, there've been no big changes announced. But according to analyst James Higgins of Donaldson Lufkin & Jenrette, AMR's management is looking at the possibility of breaking off the company's commuter subsidiary and the rest of the Sabre reservation system, now that the airline's labor problems are under control. If that happens, says Higgins, the stock-- which he likes even in the absence of a restructuring--could go from its current $83 share price to well north of $100: The company's full breakup value, he figures, is above $120 a share.

4. INTERNATIONAL

When U.S. stocks turn south, investment professionals usually advise their clients to put some of their money overseas--to diversify into markets that should do better. This is wise counsel but not as easy as it sounds. For starters, many foreign bourses move in tandem with American markets, so international investing can actually compound the risk posed by a U.S. stock decline rather than reduce it. What's more, stocks in Latin America and other appealing emerging markets have a history of getting beaten when U.S. interest rates rise--and that's just the direction rates seem to be headed. Meanwhile, many Asian markets are shaky because of the impending Chinese takeover of Hong Kong as well as concerns about the health of the Japanese banking system. That's why we searched for a market that wasn't too dependent on rising stock prices in New York, in an economy that could survive higher U.S. rates.

We turned our attention to Europe, where the clear favorite is Germany. Not only is it the continent's biggest economic player, it's also a country that's at a very different point in the economic cycle than the U.S. While America has been booming for six years, the German economy is now speeding up after a sharp slowdown last year. In addition, while the Federal Reserve is pushing rates higher, the Bundesbank is keeping interest rates at postwar lows. Further, no European country has been more aggressive than Germany about taking advantage of new opportunities in Eastern Europe and the former Soviet Union. Rounding out the macro picture is the recent strength of the dollar vs. the deutsche mark, which should help mitigate the traditionally high-wage situation in Germany and make key exports like autos and chemicals more competitive.

Here's the big reason, though, we think the German market is poised to move: For years the government treated stock price appreciation as realized capital gains, making investors liable for taxes whether or not they sold the stocks in their portfolio. Not only did this make buying stocks unappealing to average Germans, it also discouraged German companies from doing much to boost their stock prices. But earlier this year the government scrapped the old tax system. And with last year's privatization of Deutsche Telekom, millions of individual investors have been brought into German stocks for the first time. DT's success should only whet the average German's appetite for equities.

Our preferred way to play these opportunities is the closed-end New Germany fund, which trades on the New York Stock Exchange. Managed by Hanspeter Ackermann, the fund invests in mid-cap stocks, whose profits are growing at twice the pace of their big-cap brethren, and should be among the biggest beneficiaries of the German tax reforms. What's more, this closed-end fund is trading at a staggering 22% discount to the portfolio's underlying net asset value. Strategist Bob Stovall says he expects this gap to narrow significantly as U.S. investors increase their overseas holdings.

Another, more highly charged option is the closed-end Central European Equity fund, also run by Ackermann. Not only do you get a chunk of the German market, you also get some exposure to the exciting (but more risky) bourses of Eastern Europe. Ackermann has 56% of this fund's assets in German large-cap stocks, with the balance in markets like Poland, Hungary, the Czech Republic, and Russia. And this fund, too, is trading at a heavy discount: 19.7% below the NAV.

5. PREFERRED STOCK AND CONVERTIBLE BONDS

For many investors income isn't an added bonus while you wait for price appreciation--it's an absolute necessity. Unfortunately, finding something that offers an above-average yield with a tolerable degree of risk isn't easy. And just getting information on slightly more unusual income-oriented choices, such as convertible bonds or preferred stocks, can be a hassle since these instruments don't have huge followings on Wall Street. We managed to uncover two good choices for investors, one of which carries the added kick of potential price appreciation.

Our first idea is a convertible bond. "This is a very timely investment strategy, since attractive convertible securities offer 75% to 85% of the price appreciation on a stock, while only exposing you to 50% of the downside," says money manager Tracy Maitland of Advent Capital. Our favorite convert comes from retailer Saks Fifth Avenue, carrying a yield of 5.7%. Think of this security as a way to play Saks stock, which we like, while collecting a plush dividend. Maitland of Advent Capital estimates that a 30% rise in Saks stock could produce price appreciation of 20% to 25% in the bond over a one-year period. Of course, a drop in the stock would hurt the bond price, but the dividend yield limits the risk. If both the stock and the bond decline, you can still hold on and collect the coupon until its expiration in 2006. Saks has the right to redeem the bond beginning in September 1999, but it would have to pay a call premium, so you're covered there too.

Why does Saks's stock appeal to us? Selling to high-end customers has been among the most successful retailing strategies of the past few years, and Saks is in the process of further exploiting its niche by opening smaller, targeted stores in wealthy suburbs. Profits are expected to jump 30% this year, yet with a P/E of 13 on 1998 earnings, you're getting a ritzy brand name at a bargain-basement price.

We also like two series of preferred stock from National Westminster Bank, both of which yield over 7%. NatWest is Britain's second-largest bank and is AA rated by Moody's and Standard & Poor's. With the bank's strength in both consumer and corporate banking, the dividends are an exceptionally safe bet. The Series B, which yields 7.6%, is redeemable beginning in June 1998, while the Series C, yielding 7.3%, isn't callable until 2002. But you don't have to worry about getting hurt if the Series B is called: It's now trading at $24.50 a share, 50 cents below the call price. So you'd still win. (One note: The yields listed in the newspaper for these issues are well over 8%, but that doesn't reflect the British government's dividend tax, which is deducted automatically before you receive your check.)

6. TREASURIES

Buying U.S. Treasuries can be one of the safest investments, or one of the most risky. It depends on how you use them.

The safe route, of course, is to buy a fairly short-term bond and hold it until maturity. You're virtually guaranteed to get your principal back, along with interest income that isn't taxable at the state or local level. Right now, with the yield curve fairly flat, there's not much extra benefit in tying yourself down for a long stretch. A two-year treasury, for instance, pays about 6.5% annually, while all the way out at 30 years you get a hair over 7%. That dynamic makes Treasuries in the two- to five-year range quite appealing, especially when you weigh the odds that the stock market will produce gains dramatically higher than that over the next year or two, after the gangbuster returns we had in 1995 and 1996. So here's the strategy: Add some sure-fire safety to your portfolio by putting a bit of cash into two-year Treasuries. If the stock market does drop drastically between now and the time the bonds mature, you can sell these highly liquid assets and put the money to work in a more reasonably valued equities market.

So what about the high-risk Treasury strategy? You could make a bet on the direction of interest rates by buying long-term bonds, in the hope that rates will drop in the future. There's no better way to make a quick killing--or to lose a bundle, if rates happen to rise. According to Steven Leuthold of the Leuthold Group, right now the risk-reward ratio is most appetizing for 19-year Treasuries--those maturing in the year 2016. By Leuthold's calculations, if long-term interest rates spike up as high as 8% over the next year, these bondholders would still be roughly even, because the yield income on the coupon would balance out capital losses. On the other hand, if the long bond drops to only 6.5%, these Treasuries would show a 20% appreciation. Not a bad tradeoff.

So let's take a moment to hope the bull market lives long and prospers. But as these six strategies reveal, there are opportunities even in a period of risk and uncertainty.

ADDITIONAL REPORTING by Maria Atanasov, Joyce E. Davis, Amy R. Kover, Jeanne C. Lee, Kimberly Seals McDonald, Bethany McLean, Andrea L. Prochniak, Shaifali Puri, Edward A. Robinson, Melanie Warner, and Wilton Woods