FINANCIAL MARKETS : Stocks Rally Solidly; Bond Yields Ease

A firmer dollar and a mild bond market rally helped spark a broad advance in stocks Tuesday, in surprisingly heavy trading.

The Dow Jones industrial average closed up 24.61 points at 3,775.83, though it fell back from a gain of nearly 40 points at midday.

On the New York Stock Exchange, winners topped losers by 13 to 8, and volume surged to 307 million shares, an active session for a late-August day.

Among industrial stocks, investor interest was revitalized as farm machinery giant Deere reported strong quarterly earnings, sending its shares up 3 5/8 to 69 5/8.

The broad market was helped by a minor recovery in the dollar, which has been slumping in recent weeks.

The dollar edged up from a five-week low against the Japanese yen and gained on the German mark in an advance fueled partly by rumors that Japan’s central bank was a big buyer of the U.S. currency.

In late New York trading, the dollar was quoted at 97.90 yen, up from 97.83 on Monday. It also rose to 1.5318 marks, up from 1.5273.

The dollar’s firmness and a healthy reception at the Treasury’s auction of two-year notes gave the bond market a boost early in the day, traders said.

The Treasury sold $17.26 billion in two-year notes at an average yield of 6.27%, which was lower than expected.

But demand for longer-term securities waned as trading wore on, and the yield on the benchmark 30-year Treasury bond closed at 7.54%, down only slightly from 7.55% on Monday.

Many traders were reluctant to buy bonds ahead of today’s government report on July durable goods orders, which, if stronger than expected, could renew fears that the Federal Reserve Board will tighten credit again in September or October.

Meanwhile, some analysts are growing optimistic about the stock market’s prospects, even if the bond market sputters again.

“I think that every piece of bad news possible has been thrown at this market, and they haven’t been able to get stock prices down,” said Robert Kahan, trading chief at Montgomery Securities in San Francisco.

Tuesday’s rally was impressive for its breadth, analysts said. Retail, industrial, casino and biotech stocks, among others, drew buyers.

And the Nasdaq composite index of mostly smaller stocks, which has led the recent market advance, gained another 5.69 points to 747.98, its highest since April 11.

But Robert Stovall, president of Stovall/Twenty-First Advisers in New York, warned that if the dollar tumbles anew, it will hurt U.S. stocks because foreigners will be encouraged to sell their U.S. holdings.

“There’s not much to hold the stock market,” Stovall said. Even though corporate earnings have been strong, stock prices are already high relative to those earnings, he said.

Among Tuesday’s market highlights:

* Deere & Co.’s quarterly earnings report--and its upbeat comments about the rest of the year--helped draw buyers to other heavy-industry stocks. Caterpillar zoomed 4 3/8 to 111 5/8, Clark Equipment surged 1 7/8 to 68 1/2, Navistar rose 3/4 to 16 5/8 and Tenneco was up 1 1/8 to 46 5/8.

* Takeover speculation boosted some biotech issues. Immune Response jumped 15/32 to 7 31/32, Chiron leaped 4 1/4 to 65 3/4, Biogen soared 2 7/16 to 50 3/8 and Amgen was up 1 to 56.

* Elsewhere in the health care sector, Health Systems rocketed 2 3/8 to 26 1/8, Wellpoint Health gained 1 3/8 to 26 1/4 and PacifiCare Class A added 1 3/4 to 68.

* Retail stocks advancing included May Department Stores, up 1 1/4 to 40 1/8; J.C. Penney, up 1 1/2 to 49 5/8; Mercantile Stores, up 7/8 to 36 1/4; Staples, up 2 to 29, and Toys R Us, up 3/4 to 36 7/8.

* Casino stocks were also strong. Caesars World jumped 2 1/4 to 45, Mirage Resorts added 7/8 to 20 1/4, Hilton rose 1 1/8 to 59, Hollywood Park leaped 1 3/4 to 22 1/2 and MGM Grand gained 5/8 to 30 1/4.

* Among tech issues, Novell rose 7/8 to 14 7/8 and Microsoft added 7/8 to 55 1/2, after the rival software companies said they had met to discuss ways to make their products work better together.

But Newbridge Networks dropped 2 15/16 to 29 after the once-high-flying computer networker reported slower earnings growth than Wall Street had expected.

* Among consumer stocks, Philip Morris jumped 1 3/8 to 56 5/8 amid speculation that the tobacco giant might raise its dividend by 5% to 10% or announce a new share repurchase program at its Aug. 31 board meeting.

In foreign trading, Tokyo stocks closed weaker, with the Nikkei 225-share average easing 13.80 points to 20,380.78.

In Frankfurt, the DAX index lost 15.92 points to 2,107.87, while in London the FTSE-100 index added 3.8 points to 3,175.1.

In Mexico City, the Bolsa index eased 3.44 points to 2,755.53, after an early rally above the 2,800 mark faded.

In the U.S. municipal bond market, the city of Los Angeles sold $111 million in general obligation bonds, and traders said the securities were well-received. Yields were close to levels on the state’s recent offering of general obligation bonds.

On Monday, bond-rating agency Standard & Poor’s Corp. raised its outlook for the city’s credit rating to “stable” from “negative,” citing in part a stabilizing economy. S&P; rates the city’s debt AA, which is higher than the A rating S&P; gives the state’s debt.

In commodities trading, coffee prices surged anew amid concern that dry weather in Brazil will further damage a crop already harmed by two frosts.

December coffee futures jumped 8.10 cents to $1.976 a pound on the Coffee, Sugar and Cocoa Exchange.