Morning Rally Fizzles; Dow Average Dips 4.50

NEW YORK —  The stock market suffered a third-straight losing session Tuesday after a strong tone at the opening soured.

However, bond prices rebounded sharply, although traders and analysts characterized the gains as a technical rally in reaction to the sell-off of the past five sessions.

The Dow Jones average of 30 industrials fell 4.50 to 1,884.14. Buyers at first rallied to the blue chips, and the Dow Jones industrial average spurted more than 12 points during the morning.

But buyers lost interest, and the blue chip indicator pulled back, as it has each session since last Thursday, when it reached a record closing high of 1,919.71.

Volume on the New York Stock Exchange shrank to 137.52 million shares from 153.30 million Monday.

‘Terribly Gray Day’

“Investors anxious for a black and white resolution” were apt to feel unsatisfied because Tuesday “was a terribly gray day,” said Hugh Johnson, senior vice president at First Albany Corp. “What that tells you is that there’s a lot of confusion out there.” Some confusion is over the course of interest rates and inflation.

Recent indications of accelerating economic activity could make the Federal Reserve Board unwilling to drive interest rates any lower, analysts say. Faster economic growth might also cause higher interest rates and inflation, they say.

Investors might stay on the sidelines until a clearer economic picture emerges. Government reports due later this week on retail sales and producer prices could put the picture into sharper focus.

Western Air Lines rose 1 1/2 to 11 5/8 and was volume leader on the New York Stock Exchange with more than 4.1 million shares traded. The buying was due to market discussion that the carrier had received a takeover offer from Delta Air Lines, which wound up unchanged at 42 1/8. After the close, the companies confirmed that they have agreed to merge.

Gifford-Hill went against the overall market trend and shot up 8 5/8 to 31 1/2. The company said it has agreed to be acquired by Britain’s C. H. Beazer Holdings for $32 a share, or about $275 million.

International Business Machines ranked second on the Big Board’s actives roster and rose 1/8 to 143 7/8. Another blue chip, American Telephone & Telegraph, was next, gaining to 25.

Rounding out the top 10 most actively traded stocks on the Big Board were: Philip Morris, up 5/8 to 70 3/4; Mobil, up 3/8 to 37 3/8; Syntex, up 62 1/2; Pacific Gas & Electric, down 3/8 to 25; Pepsico, up 1 to 29 7/8; Exxon, down 5/8 to 69 3/8; and, Illinois Power, down 1/2 to 29 3/4.

In the daily NYSE tally, 990 issues posted price declines, while 645 rose and 379 were unchanged.

Large blocks of 10,000 or more shares traded on the NYSE totaled 2,597, compared to 2,595.

In the credit markets, the 30-year Treasury bond, down about $7 for each $1,000 in face value on Monday, surged by about 1 1/2 points, or about $15 per $1,000 in face value. The yield fell to 7.48% from 7.60% late Monday.

Secondary Market

In the secondary market for Treasury bonds, prices of short-term governments rose in the range of 3/8 point to 5/16 point, intermediate maturities rose 7/16 to 7/8 and 20-year issues were up about 1 5/16, according to the investment firm of Salomon Bros.

In corporate trading, industrials rose 3/4 point. Utilities rose 1/2.

Among tax-exempt municipal bonds, general obligations rose 3/8 point and revenue bonds were up 1 point. Trading was moderate.

Yields on three-month Treasury bills were down 6 basis points to 5.19%. Six-month bills fell 4 basis points to 5.32% and one-year bills were down 7 basis points at 5.41%. The federal funds rate, the interest on overnight loans between banks, traded at 5.75%, up from 5.688% late Monday.