Blue Chips Hit 3-Month Low; Dow Off 43.36

Big-name stocks continued to grind lower Tuesday, dropping the Dow Jones industrial average to a three-month low.

But indexes of smaller stocks continued to hold up, easing only modestly from their recent record highs. Several new issues got rousing welcomes on Wall Street.

The blue-chip Dow Jones industrial average sank 43.36 points to 5,420.95, its fourth straight loss and the lowest close since the index ended at 5,407.59 on Feb. 5.

Most other stock indexes also lost ground, thought the declines were much smaller than the Dow’s.

On the New York Stock Exchange, losers had a 13 to 10 edge over winners. On Nasdaq losers led by 21 to 16, but the Nasdaq composite index of mostly smaller stocks fell just 3.64 points to 1,182.67.

Analysts said last week’s surge in long-term bond yields continues to weigh on stocks. Yields had jumped to one-year highs on fresh signs of U.S. economic strength, as investors bet that either inflation will rise, or the Federal Reserve Board will tighten credit, or both.

On Tuesday, yields inched up after falling on Monday. The Treasury’s auction of $19 billion in three-year notes saw mildly disappointing demand, traders said. The average yield on the notes was 6.39%.

Among longer-term issues, the yield on the 30-year Treasury bond rose to 7.08% from 7.05% Monday.

The weak results at the T-note auction underscored concern among bond participants about the trend in interest rates. If the economy continues to show surprising strength, yields could continue to rise, making buyers of bonds at current yields look foolish.

Today, the government goes to market again, auctioning $14 billion in 10-year notes.

For stocks, meanwhile, higher interest rates appear to be presenting at least blue-chip issues with formidable competition for investors’ dollars.

Yet investors’ recent attraction to smaller, more speculative stocks hasn’t shown many signs of fading. Indeed, buyers on Tuesday rushed after shares of Millennium Pharmaceuticals, a biotech firm that is working on a drug to combat obesity.

The company sold 4.5 million shares at 12 apiece, and the stock rocketed to close at 19 on Nasdaq.

Also, specialty retailer Loehmann’s went public, selling 3.57 million shares at 17. The stock soared to 23 5/8 on Nasdaq.

Although investors’ demand for new issues and other more speculative stocks has helped send the Nasdaq market soaring in recent weeks on record volume--while blue chips weaken--some analysts warn that such speculative activity is often a harbinger of a market peak--as stocks suck in the last of investors waiting on the sidelines.

But stock bulls say investors are naturally migrating to smaller stocks as the U.S. economy improves, thus boosting prospects for domestically oriented smaller firms.

As for the Dow, it is facing a crucial test: The 5,400 level has been a key area of support for the index since early February. If it falls through that level, the sell-off in blue chips could deepen.

Among Tuesday’s highlights:

* Many technology stocks continued to bolster the Nasdaq market. Apple Computer gained 1 1/4 to 26 7/8, Xylan rose 4 to 67 1/2, PeopleSoft jumped 3 to 66 1/2 and Cisco Systems added 7/8 to 52 1/4.

But Zenith Electronics tumbled 5 5/8 to 17 1/4 after nearly quadrupling in the week since the company announced plans to sell systems that would allow Internet access via cable TV. Many analysts are downplaying Zenith’s chances of success with the system.

Elsewhere, in a prime example of some investors’ new fascination with low-priced stocks, Curtis Mathes Holding jumped 1 1/4 to 2 5/8 after the venerable name in American TV manufacturing said it would demonstrate by the end of the month a TV that has an Internet-ready computer inside.

* Some gold stocks rose on news that brokerage Morgan Stanley’s chief investment strategist, Barton Biggs, recommended buying gold shares, as an inflation hedge. Barrick Gold gained 7/8 to 31 3/4, Newmont Gold rose 1 1/8 to 60 and Placer Dome jumped 3/4 to 29 1/4.

* Whittaker lost 4 3/8 to 18 1/2. The Southland aerospace and communications-products company warned that its communications unit will record an operating loss in the quarter just ended. Another Southland firm, apparel maker Authentic Fitness, sank 3 to 17 7/8 after reporting weaker-than-expected earnings.

* Turner Broadcasting Class B fell 3/4 at 25 7/8 on published reports that regulators may recommend blocking Time Warner’s $7 billion acquisition of TBS. Time Warner eased 1/4 to 39 1/2.

* Cinergy added 7/8 at 28 7/8 and General Public Utilities gained 3/8 at 31 3/8. Midlands Electricity of Britain said it has agreed to be purchased for about $2.59 billion by a partnership between the two U.S. utilities.

Overseas, Tokyo’s Nikkei index lost 167.10 points to end at 21,495.28. It was the first time since April 8 that the Nikkei had closed below 21,500. London’s FTSE 100 index closed 28.6 points lower at 3,723.0, a five-week low.

In commodities trading, wheat prices rose strongly again as fresh fears about poor growing weather in the U.S. Plains and Midwest took hold of the market and renewed concerns about the lowest grain supplies in years.