My oldest daughter was retained after 4th grade...... she, too, was very bright, but was struggling with getting things done.....
She hadn't memorized the multiplication tables, for one, and was still trying to multiply by counting..... but... as a bit of background, when they did the Iowa Basics tests in 4th grade, her math computation (multiplication, etc.) was on a 3rd grade level, but math comprehension was on a 7th grade level... she understood it intuitively, but didn't have the mechanics of it down...
Anyway, we were moving from Iowa (a very small school district, less than 900 K-12) to a much bigger district in Texas, so we had her repeat 4th grade when we got to Texas.
However, she was a young student.... her birthday is in August, and she was also always petite, so she didn't stand out by being the tallest in her class.
We always got those letters that she was at risk of "dropping out" because she had been retained.... but she is almost finished with her doctorate in microbiology at Johns Hopkins!
I think you need to go in and talk to the counselor and explain how his reading has "clicked" these last few days, and want to discuss putting him on in second grade... have them see for themselves how his reading has changed.
A question though.... is he simply "decoding" the words (able to pronounce them easily as he reads them), or does he really understand what the words mean? After he reads a story, can he tell you what it means? Have you asked him questions about the story to see if he understood the story? That can be a big indicator of reading readiness.....