FINANCIAL MARKETS : Stocks Do U-Turn in Last Hour; Bonds Rally

Another strong stock rally shifted abruptly into reverse in the final hour Thursday, sending most major market indexes into negative territory in heavy trading.

But bond yields plummeted for a second straight day to one-year lows, on hopes for a sluggish April employment report today--which would further confirm the economy’s slowdown.

On Wall Street, the Dow Jones industrial average lost 13.49 points to 4,359.66 after surging 38 points by midday, on the heels of Wednesday’s 44-point gain.

The broad market was mixed, though: Winners narrowly edged losers on the New York Stock Exchange, and the Standard & Poor’s 500 index edged up 0.06 point to a new record 520.54.

Traders said the market’s early euphoria was dashed by a wave of profit taking late in the day. The selling was said to have begun in stock index futures contracts.

The retreat accelerated as four rounds of computer-guided “sell” orders bombarded the market beginning at 2:40 p.m. EDT, according to Birinyi Associates.

The Dow quickly fell to a loss of 24 points before recovering a bit in the final minutes.

Analysts said market’s setback was long overdue, given the nearly straight-up performance of the Dow since early-March.

“The market is very extended on the upside,” said Philip Roth, technical analyst at Dean Witter Reynolds. “At some point somebody said, ‘Hey I’ve got enough profits, let’s take them.’ ”

The bond market, too, was hit by profit-taking late in the day, but yields still finished far below Wednesday’s levels.

The Labor Department on Thursday said first-time unemployment claims rose by 20,000 to 371,000 last week, the highest level since July. That hinted that today’s April employment report will be weaker than expected.

Stock and bond market investors alike have been yearning for assurance that the economy has slowed, which would all but guarantee that the Federal Reserve is finished raising interest rates.

In the bond market Thursday, the 30-year Treasury yield slumped to 7.16%, down from Wednesday’s 7.23% and the lowest since 7.10% on April 26, 1994.

At the session low on Thursday the yield was 7.12%.

“It looks like the next objective is 7%,” said Ron Speaker, who manages $800 million of bonds at Janus Capital Corp. “You could easily do that if the bulls have their way. Bond investors are feeling more comfortable” amid mounting proof of an economic slowdown.

Shorter-term rates also tumbled Thursday. The six-month T-bill yield closed at 5.91%, down from 5.96% on Wednesday.

Among the market highlights:

* Major blue-chip stocks hit by profit-taking included Philip Morris, which dropped 2 to 70 5/8. Citing the stock’s recent surge, a Salomon Bros. analyst downgraded it to “hold” from “buy,” though the analyst said the earnings outlook remains “fantastic.”

* Other big-name stocks losing ground included Alcoa, down 1 3/4 to 43 7/8; GM, down 1 3/8 to 43 1/4, and Caterpillar, down 1 1/8 to 56 3/8.

* HMO stocks continued their recent selloff on earnings worries. Southland HMO FHP International plunged 3 1/8 to 19 3/4 after reporting earnings below analysts’ estimates.

Also, United Health Care fell 3 1/4 to 34 5/8 after reporting lower-than-expected earnings.

Other HMO losers included PacifiCare A, down 4 1/8 to 58 3/4, and Humana, off 1 1/2 to 18 1/4.

* Retailer Ann Taylor slumped 4 1/4 to 20 1/4 after warning of continued weak earnings because of falling sales.

* On the up side, some technology stocks continued to rally. The strength was concentrated in semiconductor issues. “Nobody understands the depth of demand in this semiconductor cycle,” contends Charles Howley, trader at SoundView Financial Group.

National Semiconductor rose 1/2 to 25 1/4, Intel surged 2 1/2 to 109 7/8 and Texas Instruments was up 3/4 to 110 7/8.

* Many financial stocks also were higher, as interest rate fell. Citicorp gained 1 3/8 to 48 5/8, Wells Fargo jumped 2 7/8 to 172 1/4 and Federal National Mortgage gained 1 5/8 to 88 3/4.

Overseas, Frankfurt’s DAX index ended up 16.11 points at 2,044.79, and London’s FTSE-100 index closed at 3,264.3, up 1.7 points. Mexico’s Bolsa index finished down 12.00 points at 2,007.57. Japanese markets remain closed for a week-long holiday.