Blue Chips Spark Rally; Yields Dip

Blue-chip stocks rebounded sharply Wednesday from their weeklong losing streak, propelling the market to its biggest rally in nearly four weeks.

The Dow Jones industrial average ended up 84.66 points at 6,740.74, its best gain since Jan. 3, when it surged 102 points.

Broader measures were mostly higher, with smaller and more speculative issues lagging the advance in blue-chip and other large companies.

Analysts said the market’s extreme volatility prompted investors to seek the relative safety of big-name stocks.

“Today the name of the game was the blue chips,” said Peter Coolidge, senior equity trader at Brean Murray & Co. “There’s still a lot of nervousness in the small-cap names.”

The cautious mood was also reflected in Nasdaq’s performance, analysts said. The technology-laden Nasdaq composite index managed only a fractional gain of 0.80 point to 1,355.17, while drug stocks and other big-name defensive stocks fared better.

Bonds finished a shade higher after a volatile session that saw the yield on the 30-year Treasury briefly shoot toward 7%. Bonds quickly recovered, bringing the yield to 6.91%, below late Tuesday’s 6.93%.

The long bond’s yield hasn’t finished a day above 7%--a psychological barrier at which some investors start shifting money from stocks toward relatively risk-free Treasury securities--since September.

The early spike in interest rates came despite a morning report saying orders to U.S. factories for big-ticket durable goods--a key gauge of the manufacturing sector--unexpectedly fell 1.7% in December.

The decline contrasted with other recent data suggesting economic growth accelerated at year’s end, threatening to aggravate inflationary pressures such as rising wages. Recent inflation reports, however, have revealed no significant price jumps in most regions and sectors. That has spurred optimism that next week’s strategy meeting of Federal Reserve Board policy-makers won’t produce an interest rate increase aimed at slowing things down.

The durable-goods report “was a good number for bonds, but there’s still some trepidation ahead of some other numbers coming out and the Fed meeting next week,” said Hildegard Zagorski, a market analyst at Prudential Securities. She also noted that today’s scheduled Senate appearance by Fed Chairman Alan Greenspan compounded the current anxiety. “We’re going to have to see some further action in the days ahead to see if [the recent pullback] has really bottomed out.”

Advancing issues outnumbered decliners by a narrow margin on the New York Stock Exchange. Among other indexes, the Standard & Poor’s 500-stock list rose 7.48 points to 772.50, and the NYSE’s composite index rose 3.23 points to 406.09.

Analysts said several upcoming events are pivotal for the market’s overall outlook, particularly Friday’s fourth-quarter gross domestic product report and Greenspan’s testimony on the state of the economy before the Senate Finance Committee. Greenspan’s testimony begins at 10 a.m.

“Unless one of those events produces a surprise, the market should try to rally here,” said Dan Ascani, president and director of research at Global Market Strategists Inc. “A bounce of some kind here would be normal.”

But even if stocks do manage a near-term recovery, Ascani said, “we’re about out of January now, so the market will probably have a rough road ahead.”

The concern is that when January ends, with it may go the furious inflow of retirement fund cash that has provided an important source of market momentum, particularly for big-name stocks, which have boomed in recent months.

Analysts did see some reasons to be optimistic that a new rally could be in the making, however, if the economy proves to be more resilient than expected.

“We could have a banner day on Friday with a strong fourth-quarter GDP,” said Robert Froehlich, chief investment strategist at Van Kampen American Capital. “With labor costs not going through the roof and a strong economy, the stock market could decide, ‘This looks good for earnings.’ ”

Among Wednesday’s highlights:

* The Dow’s big gainers included IBM, which rose 5 5/8 to 156 3/8, padding Tuesday’s 5-point gain; General Electric, up 3 to 103 5/8; DuPont, up 2 7/8 to 107 1/4; Philip Morris, up 2 to 116 3/8; and Intel, up 3 3/4 to 154 3/4.

* Drug stocks continued to fare well. Bristol-Myers Squibb rose 3 1/2 to 123 1/2; Merck rose 1 1/4 to 88 1/4; Warner-Lambert gained 2 5/8 to 78 7/8.

* Oil company shares also bolstered the Dow as energy prices rose in futures trading on news of tight supplies: Exxon rose 2 3/4 to 103 1/4; Texaco rose 1 3/4 to 107; Chevron rose 1 5/8 to 66 5/8.

* Planet Hollywood International fell 3/8 to 17 1/2 to a record low after Hilton Hotels said that if it buys ITT, it will review ITT’s agreement to build two casino hotels with the company.

* Warnings of disappointing earnings caused several issues to skid. Brinker International dropped 4 1/4 to 11; 360 Communications fell 2 3/4 to 19 1/4; Applix declined 5 3/4 to 17; Actel sank 5 1/2 to 20.

Overseas, Tokyo’s Nikkei stock average rose 3%, Frankfurt’s DAX index rose 0.3%, and London’s FTSE-100 fell 0.7%.