Rate-Wary Traders Take to Sidelines as Dow Slides 26.79

NEW YORK — The stock market retreated for the second straight session Thursday in selling ascribed to concern over a weak dollar and rising interest rates.

The Dow Jones industrial average fell 26.79 to 2,675.06, bringing its drop since it hit a record closing high Tuesday to 47.36 points.

Volume on the New York Stock Exchange slowed to 163.61 million shares from 196.19 million Wednesday.

Bond prices, meanwhile, plunged as market participants became convinced that the Federal Reserve had moved to raise interest rates.

Analysts said the rise in rates has increased the competitive appeal of interest-bearing investments in comparison to stocks. Yields on long-term Treasury bonds have pushed above 9% lately, and short-term Treasury bills now return well above 6%.

Brokers also said traders have been unsettled by recent weakness in International Business Machines stock, which took a leading role in the market’s rally of the past few months and is often described as a market “bellwether.” IBM dropped 1 5/8 to 166 in active trading.

With all the various negatives, analysts noted that the relatively slow pace of activity suggested no urgency to sell. Many described the decline during the past two days as an overdue pause after the runaway rise of the market since late spring.

“The pullback is orderly, and the low volume shows there is no sense of panic or pressure. Stocks are not being sold out of fear; this is a round of normal profit taking,” said Alan Ackerman of Gruntal and Co.

Tobacco stocks slumped in selling ascribed to profit taking after a recent strong advance prompted by court decisions favorable to the industry in product-liability cases. Philip Morris fell 3 3/4 to 118 5/8, and RJR Nabisco was down 2 at 68 1/8.

Other losers among the blue chips included General Electric, down 1 at 62 7/8; American Telephone & Telegraph, down 3/4 at 33 5/8; Ford Motor, down 3 5/8 at 107 3/4; Merck, down 1 5/8 at 205 7/8 and Eastman Kodak, down 2 at 100.

30-Year Bond Falls

Savings and loan issues, which are highly sensitive to changing interest-rate expectations, showed some losses. H. F. Ahmanson dropped 1 1/2 to 22, while Great Western Financial slipped 1 1/8 to 22.

The Treasury’s 30-year bond dropped about 1 1/2 points, or about $15 for every $1,000 in face value, as its yield jumped to 9.12% from 8.98% Wednesday.

It was the first time the bellwether issue had risen above the 9% mark since Aug. 4.

Traders were disappointed that the Fed added only $2 billion to the banking system in its daily open market activity. A larger injection of reserves would have helped lower the federal funds rate, which stood at 6.94% Thursday.

Yields on three-month Treasury bills, meanwhile, rose 2 basis points to 6.28%. Yields on six-month bills advanced 11 basis points to 6.28%; the one-year bill gained 11 basis points to 6.72%.