JonathanBurton

SAN FRANCISCO (MarketWatch) — Even a round of upbeat corporate earnings may not sway some investors convinced that U.S. stocks are close to a top. For those looking to protect the past years’ strong gains, a barbell strategy can buffer your portfolio through a slower patch.

The strategy is a muscular, all-weather approach that balances aggressive stocks on one side with defensive stocks on the other. If earnings — which wowed Wall Street this week — start to slow, you’ll want strong, stable companies as a cushion against general market weakness.

Our Trading Deck has been home to a spirited debate over whether were in for a crash.

“You want to build a barbell that will do well when things are going well, but give you some portfolio insurance when things are more volatile,” said Brian Belski, chief investment strategist at Oppenheimer Asset Management Inc.

This game plan covers the entire field, and is worth drawing up when stocks show few signs of flagging. The barbell need not represent all of your stock portfolio, or even its core, but in periods of uncertainty you’ll appreciate the even-keeled exposure.

“We still believe plenty of opportunities exist,” Belski wrote in a recent research note to clients. “But investment decisions will need to be more strategic and disciplined, based on market conditions.”

Knockout earnings from Apple Inc. AAPL, -0.26% Intel Corp. INTC, -1.06%  and other corporations, along with rosy forecasts and hiked dividends, helped U.S. stock investors in the past week overcome a bout of anxiety sparked by Standard & Poor’s move to cut its outlook on the U.S. long-term credit rating.

The Dow Jones Industrial Average DJIA, -1.00%  clocked three straight days of gains to end the week at a June 2008 high, up 8% for the year and 91% from its March 2009 closing low. The Nasdaq Composite COMP, -0.60% up 2% in the past week, has more than doubled since March 2009. Read more on how stocks ended the week.

But that momentum could start to wane if prospects for the U.S. or global economy start to dim again. If there’s no rising tide to lift all the market’s boats, you have to be selective. Such an environment favors stock-by-stock, fundamental analysis over blanket sector buys — a classic stock-picker’s market.

Pushing the bar

Barbell investing is a common strategy for bond holders. The tactic employs short-term securities at one end and long-term issues on the other side. Other barbell strategies blend bonds and stocks, offsetting high-risk holdings with super-safe cash and Treasurys.

In this all-stock barbell, the focus is on large-capitalization issues at either end of the risk spectrum.

In the aggressive corner are high-quality shares — companies Standard & Poor’s rates A- or better – that are more volatile than the S&P 500-stock index SPX, -0.80%   yet offer superior earnings growth and have plenty of cash on hand.

Earnings growth is important for obvious reasons. Investors pay up for consistently higher earnings, and the premium is even greater at times when the outlook for the economy and future earnings growth is murky.

Cash in the bank is crucial as well. Cash gives a company a cushion if business slows, plus the flexibility to make acquisitions to grow the business, buy back shares, or hand that money to shareholders in the form of dividends. Such actions, Belski noted, “should ultimately benefit the share prices of these companies.”