FINANCIAL MARKETS : Dow Rallies 34 Points on Prospect of Stable Rates; 2-Year Notes Snapped Up

A strong rally swept Wall Street on Wednesday in surprisingly heavy trading, as investors continued to register relief over interest rates’ recent stability.

Meanwhile, individual investors snapped up two-year Treasury notes as the government auctioned $17.3 billion of the securities at a top yield of 7.57%.

In the stock market, the Dow industrials shot up 50 points by midday, then closed with a gain of 34.65 points at 3,801.80.

In the broader market, winners topped losers by 14 to 9 on the New York Stock Exchange, as volume soared to 381 million shares--extraordinary activity for a pre-holiday week.

After selling off in late November and then again in early December, the stock market has rallied over the past week as bargain hunters have re-entered. The Dow has rebounded 3.2% since sliding to 3,685 on Dec. 8.

The Federal Reserve Board’s decision Tuesday to refrain from boosting short-term interest rates for a seventh time this year has revitalized the market, some analysts say. The prospect of stable interest rates has allowed investors to refocus on continued strong corporate earnings growth.

What’s more, Wall Street lore is that stocks often strengthen at year’s end, so some buyers are attempting to get in ahead of any substantial rally.

“The Fed’s out of our face, there are favorable seasonalities, and so the market is doing a little bit better,” said Larry Wachtel, analyst at Prudential Securities. “I’m not saying it’s a brave new world, but . . . the alarm is out of the market.”

In the bond market, short-term Treasury yields continued to ease Wednesday, reacting to the Fed’s restraint. The three-month T-bill yield slipped to 5.55% from 5.61% on Tuesday and 5.72% on Monday.

Among longer-term issues, the 30-year T-bond yield ended unchanged at 7.84%.

The Treasury’s auction of two-year notes, meanwhile, went better than expected--partly because demand was so heavy from individual investors. The Treasury received $2.38 billion of “non-competitive” offers for the notes, up from $1.20 billion at the last two-year note auction Nov. 21.

Individual buyers of Treasury securities typically make non-competitive offers, meaning they agree to accept the average yield on the securities. The doubling of non-competitive offers for two-year notes since November shows how attractive the public believes shorter-term yields have become, analysts say.

But the siphoning of investors’ savings into shorter-term bonds--and away from stocks--has dire implications for stocks in 1995, some Wall Streeters warn.

What’s more, many experts believe the current stability in rates won’t last and that the Fed will be ready to raise rates again by late January to brake economic growth.

Among Wednesday’s highlights:

* Technology stocks, market leaders in 1994, resumed their rally. Their strength helped power the Nasdaq composite index of mostly smaller stocks to an 8.61-point gain, to 737.12.

Among tech winners, software giant Oracle shot up 3 to 42 3/8 after reporting 51% earnings growth in the quarter ended Nov. 30. And IBM gained 2 7/8 to 73 5/8 after Merrill Lynch boosted its current-quarter earnings estimate for the company to $1.93 a share from $1.74, citing higher mainframe computer sales.

* Other tech issues surging on earnings optimism included Intel, up 1 3/8 to 62 5/8; Computer Associates, up 2 5/8 to 47 3/4; Sierra On-Line, up 3 to 33; Sun Microsystems, up 1 5/16 to 35 1/16, and Davidson Associates, up 2 to 31 1/4.

* Industrial stocks rebounding included TRW, up 1 3/8 to 66 1/8; Cummins Engine, up 1 3/8 to 45 1/2; Caterpillar, up 1 1/8 to 53 1/2, and Alcoa, up 2 1/8 to 82 7/8.

* In the takeover arena, Teledyne rocketed 3 5/8 to 20 3/4 on news that steel firm WHX had made a bid of $22 a share, which Teledyne rejected.

Also, takeover rumors sent biotech firm Biogen surging 6 5/8 to 42 1/4, though the company denied it is for sale.

* On the downside, insurance giant Cigna fell 4 to 62 3/4 after rating firm A.M. Best downgraded the company. And Marvel Entertainment slumped 1 5/8 to 14 1/4 after saying 1994 earnings will be below expectations.

In foreign trading, Mexico City’s Bolsa index plunged again, losing 70.5 points to 2,203.67. U.S.-traded Mexican shares falling in tandem included Telmex, down 1 to 45; Empresas ICA, off 7/8 to 23 1/8, and Grupo Tribasa, down 2 1/8 to 22 3/8.

Among other foreign markets, Tokyo’s 225-share Nikkei average fell 66.31 points to 19,340.67. In Frankfurt, the DAX index finished at 2,086.66, up 6.73 points, while London’s FTSE-100 index added 12.3 points to 3,070.4.