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Global Macro: Bulls Won't Give Up Rally

Stocks in this article: VXX QQQ SPY

NEW YORK (TheStreet) -- Global equity markets rose on Tuesday, proving that bullish investors aren't giving up the rally without a fight.

On Tuesday, I wrote that global equities could begin a downtrend in the coming weeks because of weak economic data and slow earnings growth. The bearish thesis looks to be on hold for now as equity indexes pared losses from the day before on strong retail numbers.

Early Tuesday, news came out that core retail sales, which exclude auto sales, for December beat estimates. That showed that consumer demand remained strong through the last quarter of 2013. The continuation of this trend into 2014 could lead to U.S. gross domestic product growth of 3%-4% for the first quarter. That would be bullish for stocks and take off some of the pressure that last week's labor numbers had put on the economy.

Underlying technical factors also led to Tuesday's move higher. The iPath S&P 500 VIX ST Futures ETN  (VXX) is still at dormant levels that indicate true equity market fear is almost nonexistent. The volatility indicator rose 9% during Monday's selloff and declined 8% the following day, meaning that any anxiety introduced into the markets is quickly extinguished.

The VIX should continue to trade at low levels for three reasons. The first is that the Federal Reserve remains committed to a short-term 0% interest rate, even as the economy improves. Although stimulus is slowing being removed, the Fed aims to replace it with transparent guidance of its future action.

The next factor is U.S. corporate strength. Companies are hoarding trillions of dollars in cash that await productive usage. That buffer gives companies the freedom to invest and grow, and provides some safety in case of another economic downturn. Companies have also become more efficient, able to produce strong profits on weak revenue.

The last factor is the gradually improving economy. Although some numbers have fallen short of estimates, the trend as a whole is positive. If the global economic recovery keeps pace or even accelerates this year, then equity markets should continue to move higher.

The PowerShares QQQ  (QQQ) over SPDR S&P 500  (SPY) is a relative strength indicator that measures equity market sentiment. The Nasdaq has many technology momentum stocks that are strong when investor confidence is high.

The Nasdaq 100 began to outperform the S&P 500 index in early August. Since then, the pair has consolidated regularly ahead of Fed meetings, but ultimately moved higher, regardless of a reduction in stimulus.

The continued strength of momentum stocks versus larger-cap stocks in the S&P 500 shows that equities may have enough fuel to push toward record highs this year.

QQQ 1 Year Price Returns ChartQQQ 1 Year Price Returns data by YCharts

At the time of publication, the author had no position in any of the index funds mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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