#-ad_banner-#​Two weeks ago, I said that as long as technology and small-cap issues continued to outperform, I viewed the broader market’s recent weakness as a temporary countertrend correction rather than a sustainable decline. My expectations materialized last week as all major U.S. stock indices closed sharply higher, led once again by the tech-heavy Nasdaq 100 and small cap Russell 2000. Both are now up more than 5% for the year. 

Last week’s rally was triggered by the Federal Reserve’s March 18 statement and Chair Janet Yellen’s subsequent comments, which were collectively viewed as being dovish and likely to postpone the inevitable rise in U.S. interest rates to later this year. 

Adding fuel to the fire was the fact that investors were bearishly over-committed headed into the meeting, according to the elevated extreme in the CBOE Put/Call Ratio that I pointed out in in the previous Market Outlook. This increased the initial buying pressure on Wednesday as these bearish investors scrambled to readjust their portfolios. 

The strong rebound was led by the defensive health care and utilities sectors and pushed all major U.S. indices back into positive territory for the year. 

New Highs for Market-Leading Small Caps 
Following an initial bullish breakout from a year of investor indecision, the Russell 2000 was testing and rebounding from a retest of that breakout point at 1,213. As I said last week, “As long as 1,213 continues to loosely contain the index on the downside, my 1,320 upside target remains valid.”

The Russell gained 2.8% last week and appears to be well on its way to meeting my target, which I first mentioned on Feb. 23 and is just 4.2% above Friday’s close. 

Protect Profits on Consumer Discretionary 
Back in the Dec. 8 Market Outlook, I said conditions were favorable for the relative outperformance of the consumer discretionary sector due to a large inflow of investor assets, according to my own ETF-based metric. 

At that time, I highlighted Starbucks (NASDAQ: SBUX) as a stock to buy, and it has since risen roughly 16%, compared to a less than 2% rise in the S&P 500. The Consumer Discretionary Select Sector SPDR ETF (NYSE: XLY) has outperformed SPDR S&P 500 ETF (NYSE: SPY) by roughly 6% during that time. 

However, the same metric that indicated an unusually large inflow of investor assets in early December now indicates that this sector is historically over-invested and vulnerable to upcoming weakness and relative underperformance. 

Therefore, Market Outlook readers who have capitalized on these calls should consider tightening stops to protect their profits. 

Editor’s note: Stop-losses are the traditional way to protect against losses. But there is another way to participate in a security’s continued upside while getting additional downside protection in the form of monthly income payments. If you’re not familiar with Amber Hestla’s Maximum Income strategy, which could help you collect $1,200 or more each month, you can learn more here. 

Copper Getting Some Traction 
Since the beginning of March, I have been discussing an emerging buying opportunity in copper and related assets due to bullish positioning in the futures market by smart money commercial hedgers and extremes in investor sentiment by professional trend followers. Both have historically coincided with intermediate-term bottoms in copper prices. 

The iPath DJ-UBS Copper Sub Total Return ETN (NYSE: JJC), which emulates copper prices, rose 3.3% last week to its highest level since the beginning of the year.

JJC’s move appreciably above its 50-day moving average, a minor trend proxy, amid a positive shift in its one-month rate of change (ROC) confirms that the near-term trend has now turned bullish and clears the way for a rise to major overhead resistance at $35.69, the 200-day moving average. 

Wednesday’s Federal Reserve statement and Yellen’s dovishly interpreted remarks set the stage for more near-term strength in the U.S. stock market, and more specifically, an additional 4% rise in the market-leading Russell 2000, as long-term interest rates continue their March decline. 

Bigger picture, however, last week’s strong move higher by iPath DJ-UBS Copper Sub Total Return ETN, a surrogate for economically sensitive copper prices, may be an early indication that the market acknowledges it’s just a matter of time before a hike in interest rates to ward off the inevitable inflation that years of record low interest rates will ultimately ignite. 

This article was originally published on ProfitableTrading.com: Caution: This Market-Leading Sector’s Run May Be Over