Dow Adds Nearly 200 Points

Earlier on Tuesday, the International Monetary Fund hiked its global growth forecast to 3.5% from 3.3% for 2012 and boosted its U.S. growth outlook to 2.1% from 1.8%. The IMF said that "some optimism has returned" to the world economy but also cautioned that the optimism should be "tempered." The IMF said that growth in the United Kingdom should speed up as well, by 0.8% rather than the previously forecast 0.6%.

The IMF's outlook helped offset lackluster data on the domestic front. The Department of Commerce reported that March housing starts fell 5.8% in March to a 654,000 annual rate, which was lighter than expectations for a 705,000 rate, according to a survey by Thomson Reuters. This reading was the lowest pace since October. Building permits, however, jumped 4.5% in March to a 747,000 rate, greater than the expected 710,000 rate.

Industrial production was unchanged in March, falling short of the consensus estimate for a 0.3% rise. Capacity utilization last month was basically unchanged as well, falling to 78.6% from 78.7% and matching expectations.

Concerns about Spain's borrowing costs also abated after the country was able to sell €3.2 billion in short-term bonds, which surpassed the maximum target of €3 billion announced before the auction.

Still, short-term borrowing costs rose during the sale, with the average yield on 12-month bills at 2.623%, up from 1.418% last month and the yield on 18-month bills popping to 3.11% from 1.711% last month. Spain will hold another round of bond auctions on Thursday. The Spanish ten-year yield stayed elevated above 6%.

"In terms of Europe, demand for Spanish debt was strong even though yields remain stubbornly at the high end of the range," says Peter Cardillo, chief market economist at Rockwell Global Capital. "Still, demand was there."

The auction results came as the ZEW Center for European Economic Research in Mannheim said its index of German investor and analyst expectations increased to a far better-than-expected 23.4 from 22.3 in March -- the fifth consecutive gain and the highest reading since June 2010, despite deep problems in the peripheral nations.

London's FTSE gained 1.78% and Germany's DAX rose 2.6%.

"I think basically the fear factor in Europe is being overblown and I think that as the flow of earnings continue to hit the Street, the market is going to reflect on the earnings," says Cardillo.

Todd Salamone, director of research at Schaeffer's Investment Research, attributes some of today's buying interest to options activity.