Technical evidence is mounting that seasonal sector rotation is taking place right now, and it is crucial for investors to know which areas to lighten up and which to buy. Here, MoneyShow senior editor Tom Aspray shares the most likely profit opportunities during and after this shift.

It was an impressive week for the stock market. After Tuesday’s plunge, stocks rebounded for the rest of the week, and the major averages closed higher for the week.

The most impressive action was in the small caps. The iShares Russell 2000 Index Fund (IWM) was up almost 1.5% for the week, far better than the 0.5% gain in the Spyder Trust (SPY). It had been correcting since early February, and as of last Tuesday’s close was down 5.5% from its highs.

Small caps can often give leading signals for the overall market, as was the case in April 2011, when they topped out well ahead of the S&P 500. The strength of this rebound from the lows indicates this is not the case this time.

Though not all of the technical warnings have been resolved, it looks as though the group rotation over the past six weeks has been the correction I was looking for in the major averages.

As I discussed in Friday’s column “3 Sectors Leading the Charge,” the energy and materials sectors, like the small caps, have also corrected significantly from their 2012 highs. They could therefore fuel a further rally in the major averages, even if financials and technology take a rest.

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Stocks have certainly been the place to be in 2012. This performance chart shows that the iShares MSCI Emerging Market ETF (EEM) and the Powershares QQQ Trust (QQQ) are both up well over 15% since the start of the year. The more broadly based Spyder Trust (SPY) is up only 9.7%, with the SPDR Gold Trust (GLD) up 9.2% despite its recent correction.

The euro is up slightly for the year, while bonds have been lagging after a spectacular performance in 2011. The iShares Barclays 20 Yr Bond ETF (TLT) is down almost 5% so far this year.

The interest rate market is one that needs to be watched closely. Some of the high-yielding mortgage REITs were hit hard last week, and could drop even more. Yields on the ten-year Treasury closed well above 2%.

The economic news both here and overseas was generally positive, and the better than expected monthly jobs report on Friday helped fuel the bullish sentiment.

The apparent completion of the bond swap late last week appears to have finally cleared the way for Greece to get its next round of funding. This could turn the focus to some of the other vulnerable euro countries, like Spain and Portugal.

Tuesday’s plunging stock market was partially blamed on the lower official growth estimate for China’s economy, along with concerns over the Greek debt deal. Worries over China lessened late in the week, after the government reported its inflation rate had dropped to the lowest level in 20 months.

The prospects for China’s economy and its stock market are a hotly debated topic. On one hand, you have those who think the China bubble has burst and things are likely to get much worse. Other analysts think that investing in China now is one of the best long-term growth opportunities.

My take? Technically, the Hong Kong market does look positive from an intermediate-term standpoint. A further correction should set up a good buying opportunity.

This week, the focus will likely be on the FOMC meeting announcement on Tuesday. The Fed’s assessment of the economy is always widely watched. Retail sales are also reported Tuesday, along with business inventories.

On Wednesday, we get data on import and export prices, while the weekly unemployment claims will follow on Thursday. Also out Thursday is the Producer Price Index, the Empire State Manufacturing Survey, and the Philadelphia Fed Survey.

The week ends with more consumer data, as both the Consumer Price Index and consumer sentiment numbers will be released Friday, as well as February industrial-production figures.

It is hard to imagine that any one of this week’s economic reports will derail the stock market rally. It would probably take a string of disappointing numbers to dampen the current high appetite for stocks

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Tickers Mentioned: Tickers: SPY, DIA, QQQ, IWM, EEM