Bruce Zaro is going on the offensive. The chief U.S. technical strategist at Delta Global Advisors is convinced that a turn in the dollar's fortunes marks a defining signal for investors that it's time to reduce exposure to international stocks.

The Boston-based analyst, who utilizes both fundamental and technical analysis to manage portfolios, has some 25 years of experience. At Delta Global, Zaro also manages portfolios, mainly for institutional clients. The firm has about $2 billion in assets under management.

Zaro uses both individual stocks and exchange-traded funds in his portfolio. Right now, he's realigning portfolios as a reaction to the stronger performance of the U.S. dollar. The greenback's recent rebound is a game-changer, says Zaro.

"The U.S. dollar started rebounding in mid-July, corresponding with the topping of oil and its dramatic fall," Zaro said. "We think at the very least, it behooves investors to reshuffle the deck and tilt more to domestic holdings."

So he's taking gains made in the multiyear run by international stocks and commodities and reallocating them into broad U.S. funds. Most of his domestic ETF plays have been leaning toward mid-caps and emphasizing growth stocks. Those include the Vanguard World Mega-Cap 300 Growth ETF (NYSEArca: MGK) and the Vanguard Mid-Cap Growth ETF (AMEX: VOT).

"The spotlight now is really starting to fall on companies with global exporting capabilities. That should give mega-cap multinationals the upper hand going forward," Zaro said. "But in terms of industry coverage, mid-caps have a much broader appeal as compared to ETFs that track the S&P 500 Index. And they're still large enough to participate in global trade."

Transportation And Health Care

He's emphasizing sectors such as transportation and health care in his picks. In the U.S., Zaro likes the iShares Dow Jones Transportation Average (NYSEArca: IYT). "Fundamentally, the lower price of oil has been helping," Zaro said. "And it appears we're in the middle of the economic slowdown. It reminds me a lot of the summer of 2001."

During that time, transportation took a beating May 2001 through September 2001. "But at the end of that period, transportation stocks started to take off in anticipation of better economic times," Zaro said. "Once the market starts anticipating that an economy's on the mend, transportation usually does very well."

Of course, he's not sure the economic downturn is finished yet. "Historically, the government announces a recession well after the fact. Sometimes, it's a year later," Zaro said. "Markets always anticipate that news well in advance."

He's seeing signs by the market's recent actions that process has already started.

By contrast, health care is a more defensive play. "It has benefitted all year from the move by investors out of more-volatile parts of the market into safer health care plays," Zaro said.

As markets shift, he believes health care's momentum will slow. "Biotech is a bit of a safe haven. It represents some of the characteristics of the broader health care sector, but also has a more aggressive side as well," Zaro said.

In these uncertain times where the market seems to be leaning toward a gradual improvement in economic conditions, he's putting new money into biotech ETFs. Those include the First Trust AMEX Biotechnology Index (AMEX: FBT) and the iShares Nasdaq Biotechnology Index (AMEX: IBB). Both have been trading close to their 52-week highs and remain above their 200-day moving averages.

Zaro is also favoring IHI, the iShares Dow Jones U.S. Medical Devices ETF. "We're seeing positive movement by many of the stocks in that sector," Zaro said. "As a result, it has been trading right around its 52-week high."

Like biotech, medical devices include some aggressive characteristics relating to its high-tech orientation. "As the market moves from a more defensive to offensive position, we think something like IHI will also benefit," Zaro said.

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."