Cutting Back (Most) International Exposure

What Zaro is not putting new money into is the iShares MSCI EAFE Index (NYSEArca: EFA). He's also lowering his clients' exposure to the iShares MSCI Emerging Markets Index (NYSEArca: EEM).

"Emerging markets as compared to developed markets overseas have a higher volatility. We think EEM will have better growth prospects going forward than EFA," Zaro said. "But in a lower-growth global economic environment, we don't think that the broader emerging markets will outperform the U.S."

The exception he sees is in Latin America. Zaro is advising clients to stick with the iShares S&P Latin America 40 ETF (NYSEArca: ILF). In fact, with the ETF down close to 30% this year, he says it's likely the firm will add to those positions in the near term.

Is he concerned that such moves to a more offensive tack might be too soon?

"The summer is typically unfavorable because of lack of liquidity and dull trading. We're likely in the middle of an economic slowdown, which is making this summer season particularly difficult," Zaro said.

But markets usually react better beginning in the fall. "If you wait until the headlines get rosier, markets have already moved," Zaro said. "It'll be too late. You've got to anticipate rather than react to make money in this type of market."

What About Currency?

Although there have been several buy signals lately from a technical standpoint on the U.S. dollar, Zaro agrees that it's early in any rally. His analysis is that it hasn't reached a point yet where a rebound is sustainable.

He sold positions in the CurrencyShares Euro Trust (NYSEArca: FXE) at $154 per share in late July. Zaro is waiting for more positive signals to buy into the U.S. dollar, however.

"Moving into a more offensive position with your portfolio isn't dependant on the dollar's rally," Zaro said. "What we're saying is that a move into transport and biotech would be enhanced by a stronger dollar. But we're still moving in that direction regardless."

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