Rising hopes that interest rates soon will stabilize rather than head higher propelled stock prices aloft Monday for a second straight session.
However, this sentiment depressed the dollar because higher rates tend to make U.S. investments more attractive to foreign investors.
The Dow Jones average closed at 3,932.34, adding 23.88 points on top of Friday's nearly 50-point surge. It was the best finish for the blue-chip indicator since Oct. 19, when it hit 3,936.04.
Other major stock gauges also gained. The New York Stock Exchange composite index climbed 1.86 points to 255.81 and Standard & Poor's 500 stock index rose 3.41 points to 469.38. The Nasdaq composite of mostly smaller issues rose 6.00 points to 768.16 while the American Stock Exchange market value index increased 1.40 points to 437.53.
In the broader market, gainers beat losers by about 9 to 5 on the Big Board where trading was active. NYSE volume came to 315.58 million shares, compared to 336.71 million Friday.
The Treasury bond market and many banks and government offices were closed for the Martin Luther King Jr. Day holiday.
A change of heart by one of Wall Street's prominent bears contributed to the optimism on Wall Street. Michael Metz, Oppenheimer & Co.'s chief investment strategist, said a more favorable rate environment led him to revise his attitude toward stocks.
Based on a belief that economic growth will slow significantly, Metz said he expects stocks to advance for the next several months. He predicted that the Dow industrials will reach 4,100 sometime early this year before steadying at that higher plateau.
"We're headed for a very, very slow economy which means the Fed will be going neutral," he said. "This takes the restraining lid off the stock market for the time being."
Friday's rally was fueled by signs that the Federal Reserve Board's campaign to control inflation by subduing economic growth might be working.
An unexpectedly sluggish retail sales report combined with mild inflation readings raised hopes that the Fed won't feel the need to raise rates much more, if at all, in the near future. Until recently, many economists believed the Fed's policy arm would decide to push rates up again when it meets late this month.
In the currency market, investors were awaiting today's industrial production report that could give clues about whether the Fed will approve or defer a rate increase at its Federal Open Market committee meeting Jan. 31. Higher rates benefit the dollar because they make dollar-denominated assets more attractive.
In quiet New York trading, the dollar was quoted at 98.52 Japanese yen, up from 98.50 yen Friday. It also changed hands at 1.532 German marks, down from 1.534 marks.
Given that no economic reports were issued Monday, market participants focused closely on corporate news.
Among the market highlights:
* Banks scheduled to release quarterly earnings statements this week attracted attention. Active issues on the NYSE included Citicorp, up 7/8 to 41 1/2; BankAmerica, up 3/8 to 42 3/4, and Chemical Bank, up 1/2 to 38 7/8.
* Charles Schwab shares rose 1 7/8 to 39 1/4 after an investment tip sheet said Goldman, Sachs & Co. might try to acquire the company for $48 a share.
* Among the transports, Delta Air Lines gained 2 to 5 1/2 and Conrail rose 1 5/8 to 56.
* In utility stocks, American Electric Power rose 5/8 to 34 3/8 and Peco Energy added 5/8 to 25 1/4.
* Microsoft rose 1 3/8 to 64 1/8, getting a lift from a Merrill Lynch analyst who reiterated his buy recommendation on the stock.
* Progress Software surged 6 1/4 to 47 after posting a rise in fourth-quarter earnings.
* One stock that didn't participate in the advance was Quaker Oats, which tumbled 2 7/8 to 33 1/4. Quaker's investment rating was slashed by two brokerages.
Elsewhere, natural gas futures prices rocketed higher, halting a nine-day slide amid forecasts for colder, more seasonal weather in the northern United States.
On the New York Merc, wholesale natural gas for February delivery soared 6.7 cents, or about 5%, to $1.39 per 1,000 cubic feet.
Overseas stocks closed higher. Mexico City's Bolsa index closed 26.49 points higher at 2,243.01. The Tokyo market was closed for a public holiday.
In Frankfurt, the DAX 30-share average rose 30.02 points to close at 2,085.64, while London's Financial Times 100-share average closed up 28.4 points at 3,076.7. In Hong Kong, Hang Seng index rocketed to 251.90 points, or 3.47%, to 7,504.24.