FINANCIAL MARKETS : Dow Rises 28.26 Amid Selloff of Mexican Issues

Stocks rallied in light trading Tuesday, helped by a bond market advance and movement away from some foreign markets as the Mexican peso continued its sharp decline.

Retail stocks and Mexican issues traded on U.S. markets bucked the trend and closed sharply lower.

The Dow Jones industrial average rose 28.26 points to 3,861.69. Advancing issues outnumbered declining ones by about 7 to 6 on the New York Stock Exchange.

Volume on the floor of the Big Board came to 211.18 million shares as of 4 p.m., up from 196.54 million shares traded Friday. The markets were closed Monday for the extended Christmas holiday, and many traders were still away Tuesday. Analysts said the low volume allowed for greater volatility.

Interest rates fell, partly in response to the National Assn. of Realtors’ report that sales of previously owned homes fell in November to the lowest level in 17 months. The 30-year Treasury bond’s yield fell to 7.76% from 7.84% on Friday. It was the bond’s lowest yield since Sept. 19, when it closed at 7.75%.

Bond investors see word of slowing economic growth as good news because it indicates a low risk of inflation, which erodes the value of fixed-income securities.

Also reassuring for bond investors and inflation watchers was word that holiday retail sales were less than robust. Retail stocks were hit hard. Nordstrom fell 3 3/4 to 40 1/4; Dayton Hudson tumbled 3 7/8 to 68 7/8.

The housing and retail sales data may show that the Federal Reserve Board’s six interest rate increases this year may be starting to cool economic expansion, said Don Hays, investment strategist at Wheat First Butcher Singer.

Falling credit market interest rates make stock investors happy because they cut the cost of money to companies and make share prices more attractive relative to interest-bearing investments.

Uncertainties in foreign markets further aided U.S. equities as investors switched from so-called emerging-market investments to U.S. blue-chip stocks, said Michael Metz, investment strategist at Oppenheimer & Co.

The battered Mexican peso tumbled again Tuesday and the Bolsa index plunged 2.7%, bringing down Mexican issues traded on U.S. markets. Telefonos de Mexico dropped 2 7/8 to 37 3/4; Mexico Fund fell 3 1/4 to 20.

There was no significant movement elsewhere in foreign exchange trading, and the dollar ended mixed against other key currencies on very slight volume.

U.S. and other investors are believed to have lost billions of dollars due to the peso losing more than a third of its value in relation to the U.S. dollar in the past week.

“Risk-averse investors are switching out of emerging markets and into U.S. markets,” Metz said.

Consequently, the Dow, which includes most of the blue-chip stocks, performed better than other market indexes.

The NYSE’s composite index rose 1.04 points to 251.99. Standard & Poor’s 500-stock index rose 2.64 points to 462.47. The Nasdaq composite index rose 4 points to 746.19. At the American Stock Exchange, the market value index rose 0.59 points to 429.37.

Some market highlights:

* ITT jumped 4 3/8 to 88 1/8 as investors responded enthusiastically to the conglomerate’s agreeing to sell two of its financial businesses and planning to sell another.

* IBM rose 3/4 to 74 1/4. A Wall Street source said Cowen & Co. had raised its 1995 and 1996 earnings estimates for the computer giant.

Stocks ended mixed abroad. In Tokyo, the 225-issue Nikkei Stock Average lost 0.1%. In Frankfurt, stocks rose 0.6%; in Paris they lost 0.5%. London markets were closed for a holiday.

Cotton prices jumped as short supplies elsewhere drove buyers into the U.S. market, traders said. Cotton futures on the New York Cotton Exchange ended at their highest levels since May, 1991. The March contract set a high of 89.88 cents a pound and settled at 89.60, up 1.42 cents. Some traders said the price of cotton will soon exceed 90 cents a pound.