Dow Up Sharply as Investors Seem to Regain Confidence

Market Overview

* Blue-chip stocks closed sharply higher Wednesday as investors returned to the market with greater confidence after last week’s plunge of nearly 100 points in the Dow Jones industrial index.

* Treasury bond yields declined for the first time in five sessions, aided by a note auction that drew good demand despite the Federal Reserve Board’s move last week to boost interest rates.

Stocks

The Dow Jones industrial average was up 25.89 points to end at 3,931.92. In the broader market, advances led declines 1,274 to 844 on New York Stock Exchange volume of more than 332 million shares.

Gains in economically sensitive cyclical stocks such as Alcoa and Caterpillar boosted the Dow.

Analysts said the market’s strength masked concern that Friday’s producer price index data could bring a new round of selling, if the inflation numbers are higher than expected.

They noted investors were encouraged by the market’s ability to rebound from last Friday’s headlong drop of 96 points, sparked by the Fed’s hike in short-term interest rates.

“They’re beginning to put two and two together--that whatever happened Friday was an aberration,” said William LeFevre, senior market analyst at Ehrenkrantz King Nussbaum.

But some traders said the trauma from Friday’s market decline had not been completely forgotten.

“The investment climate has become a little more nervous as the result of Friday’s move,” said Gerry Simmons, head of institutional trading at Interstate/Johnson Lane.

Among the trading highlights:

* Cyclical stocks gained ground, with Alcoa up 1 1/8 to 80 1/2, AlliedSignal up 2 1/2 to 79 7/8 and Caterpillar up 7/8 at 108 7/8.

* The jump in the Dow was also helped by strength in Sears, up 1 1/4 to 49, and Procter & Gamble, up 2 1/4 to 59 1/4.

* WMX Technologies fell 3 1/4 to 25 after the environmental services company reported fourth-quarter results that were below Wall Street expectations.

* USAir slipped 5/8 to 13 1/2. CS First Boston downgraded its rating on the stock to hold from buy and slashed its earnings forecasts, citing the airline’s new, low fares.

* Ford reported fourth-quarter earnings that were slightly above analyst forecasts, but its shares dropped 1 to 68 1/2. A J.P. Morgan analyst said Ford’s income from operations was not as robust as some on Wall Street were expecting.

In overseas trading, London’s Financial Times-Stock Exchange 100 index ended down 11.1 at 3,429.1. In Frankfurt, the German DAX index ended at 2,085.29, down 21.92 points or 1.04%. In Tokyo, the Nikkei average fell 409.85 points to 19,841.38.

Credit

The market’s positive reaction to the second part of the Treasury’s quarterly refunding this week reassured some investors that the bond selloff triggered by the Fed credit tightening may have subsided.

The yield on the Treasury’s main 30-year bond fell to 6.40% from 6.45% late Tuesday. Its price, which moves in the opposite direction, rose 9/16 point, or $5.63 per $1,000 in face value.

The Treasury sold $12 billion in 10-year notes at an average yield of 5.92%, near expectations.

The bid-to-cover ratio, a measure of auction demand comparing number of bids offered to those accepted, was 2.58-to-1. Analysts said that was about even with an average 2.61-to-1 ratio for 10-year note auctions in the past three years.

Currency

The dollar was mostly lower in foreign exchange trading Wednesday as investors sold to capture profits from its recent strength, but the U.S. currency kept rising against the faltering British pound.

In New York, the pound finished at $1.4615, cheaper than $1.4665 a day earlier. The dollar ended at 108.35 yen, down from 108.65 yen on Tuesday.

Other dollar rates in New York compared to late Tuesday: 1.7590 German marks, down from 1.7635; 1.4765 Swiss francs, down from 1.4805, and 1.3423 Canadian dollars, down from 1.3425.

Commodities

Oil futures fell sharply on the New York Mercantile Exchange after weekly reports from the American Petroleum Institute and the Department of Energy showed unexpected increases in U.S. crude oil stocks.

March light, sweet crude oil tumbled 61 cents to $14.60 a barrel; March heating oil fell 1.17 cents to 49.40 cents a gallon.