FINANCIAL MARKETS : Stock Rally Continues in Blue Chips

Blue chip stocks on Monday retained some of the gusto from last week’s rally, but the broad market was relatively weak.

The Dow Jones industrial average jumped 17.80 points to 3,898.85, adding to last week’s gain of more than 125 points.

Buyers continued to flock to big-name stocks in cyclical industries such as chemicals, paper and mining, apparently betting that a slower economy in the near term will guarantee a more sustainable expansion in the long run.

But while the Dow rose nearly 0.5% on Monday after last week’s 3.4% rise, broader market indexes merely edged higher. The Nasdaq composite index of mostly smaller stocks, for example, added just 0.27 point to 763.21.

“We’ve got the generals leading, but the rest of the troops are staying quite a few steps behind,” said Walter Revis, market analyst at Hamilton Investments.

That divergence in performance troubles some analysts, who worry that the market rally could fizzle.

Other market pros, however, note that the Nasdaq index had advanced sharply early in the month and that blue chip issues are just catching up with smaller-stock gains.

There was little news Monday to affect stocks. The bond market was relatively tame, and yields finished largely unchanged from Friday’s levels. The yield on the 30-year Treasury bond closed at 7.49%, up marginally from 7.48% on Friday.

Meanwhile, the dollar was up against the German mark, to 1.5770 in New York from 1.5740 on Friday, but down slightly against the Japanese yen, to 100.05 yen from 100.40.

In economic news, the Commerce Department reported that Americans’ income rose 0.5% in July, which largely met analysts’ expectations and was viewed as another indication of moderate economic growth.

Some analysts said the next stock market surge--or selloff--could come Friday, when the government reports on August employment. Investors are hoping to see the employment data confirm that the economy has slowed, which would reduce the chances of another Federal Reserve Board hike in short-term interest rates.

There was renewed optimism in Europe on Monday about prospects for lower interest rates there.

The Organization for Economic Cooperation and Development said Germany’s central bank could lower key short-term interest rates further in hopes of stimulating the economy without accelerating the inflation rate.

Helped by interest rate optimism and the dollar’s strength in Europe, the Frankfurt stock market’s DAX index jumped 31.65 points to 2,193.19 on Monday.

The Swiss market also surged. Zurich’s leading stock index jumped more than 2% in active trading. But in Paris, the CAC index added just 12.53 points to 2,075.27. London markets were closed for a holiday.

In Tokyo, meanwhile, stocks closed with healthy gains in part attributed to Wall Street’s Friday rally. The Nikkei-225 share index rose 128.93 points to 20,600.42.

In Mexico City, the Bolsa index lost 26.22 points to 2,745.95.

Among U.S. market highlights:

* Industrial stocks continuing to rally included Bethlehem Steel, up 1/2 to 22 3/8; AlliedSignal, up 5/8 to 37 5/8; Union Carbide, up 1 1/4 to 33 3/4; Dow Chemical, up 2 1/4 to 73 7/8; Stone Container, up 1 3/4 to 19 5/8, and Parker Hannifin, up 7/8 to 42 1/2.

* Eastman Kodak helped pull up the Dow, leaping 1 3/8 to 50 3/4 after saying it will sell its remaining Sterling Winthrop unit to British drug company SmithKline Beecham. SmithKline’s U.S.-traded shares added 3/8 to 35 1/8.

* Energy stocks were firm as oil prices rebounded. October crude oil futures on the New York Merc surged 49 cents to $17.63 a barrel amid fresh threats against Nigeria’s striking oil workers by the military government.

Among oil stocks, Arco gained 1 to 105 5/8, Mobil added 3/8 to 83 5/8 and Texaco was up 1/4 to 62 1/4.

* Technology stocks were mixed. Hewlett-Packard jumped 3/4 to 90 and Computer Sciences gained 1 3/8 to 45 1/8, but BMC Software plunged 5 3/8 to 41, continuing its recent decline on fears that its growth rate is slowing.

* In the telecom sector, Nextel Communications plummeted 5 1/4 to 25 1/4 on disappointment that its wireless communications alliance with MCI Communications and Comcast was called off. MCI eased 3/8 to 24 and Comcast was off 1/4 to 16 1/2.

Other wireless stocks plunged on the news. OneComm slumped 6 to 24 1/2 and Dial Page dropped 4 1/4 to 25 1/2. Both firms have deals to be acquired by Nextel in stock swaps.

* Another big loser was ITT, down 4 1/8 to 82 as investors reacted badly to its decision to buy Madison Square Garden in a partnership with Cablevision Systems. Cablevision inched up 3/8 to 58.

* Among takeover issues, Brock Candy leaped 4 to 13 3/4. The firm said it is in talks with an unidentified potential buyer.

In other markets, gold advanced sharply in what traders described as heavy investment-fund buying. On the Comex, gold for current delivery surged $3.80 an ounce to $387.10.