FINANCIAL MARKETS : Dow Falls 17 But Finishes Up From Lows

Stocks closed broadly lower Wednesday for a second consecutive session, but the market finished well up from its low for the day. Trading was heavy.

In the bond market, short-term yields soared as traders bet that the Federal Reserve Board will raise interest rates again at its meeting on Tuesday. The dollar weakened further.

On Wall Street, the Dow industrials followed Tuesday’s 67.63-point slump with a drop of 17.49 points to 3,851.60, as investors continued to react badly to the surprisingly large July U.S. trade deficit reported on Tuesday.

That report had sparked a plunge in the dollar versus the Japanese yen, in turn reigniting fears of higher interest rates.

On Wednesday, brokerages Goldman Sachs & Co. and Bear, Stearns & Co. told clients to expect a Fed rate hike of as much as a half-point at the central bank’s meeting on Tuesday.

The Fed has raised short-term rates five times this year in an effort to ward off inflationary pressures. But economists at Goldman and Bear Stearns say the economy still appears to be growing faster than the Fed will allow.

The trade report, for example, showed that Americans’ appetite for imports remains voracious. With the dollar weakening again, the Fed will be concerned about the threat of higher inflation from higher prices on foreign goods, experts say.

Also, the government said Wednesday that construction of new homes rose for a second straight month in August despite higher interest rates.

“People are giving more credence to the fact that the Fed may move next week,” said Joe LaVorgna, money market analyst at UBS Securities in New York.

Indeed, the yield on three-month Treasury bills soared to 4.93%, up from 4.74% on Tuesday, as traders adjusted rates for the expected Fed move.

Long-term bond yields also edged higher. The yield on the 30-year T-bond closed at 7.80%, the highest since June, 1992 and up from 7.77% on Tuesday.

Yet in the stock market, a heavy midday selloff gave way to bargain-hunting later. The Dow had been down 46 points with one hour of trading to go.

Traders said that some “short” sellers, who had previously sold borrowed stock in a bet on falling prices, may have taken profits by buying stock on the open market to cover their bets.

The New York Stock Exchange said Wednesday that short positions reached a record 1.78 billion shares as of last Thursday, up from 1.63 billion in mid-August.

Overall, declining issues outnumbered advancers by about 12 to 5 on the NYSE on Wednesday, an improvement from the 18-to-5 ratio on Tuesday. Volume soared to 355 million shares.

Selling still was heavy in the Nasdaq market of mostly smaller stocks, where the composite index lost 6.03 points to 760.71 after diving 9.98 points Tuesday.

But Sid Dorr, trader at Charles Schwab & Co. in San Francisco, said stocks’ comeback late in the day suggested that the bears aren’t in control. “It just doesn’t feel like there’s going to be a big move to the downside here,” he said.

Traders said some sellers are simply locking in profits from the market’s recent rally, ahead of the Fed meeting next week. Bullish analysts contend that investors will be lured back into the market in October by what are expected to be strong third-quarter corporate earnings reports.

Among Wednesday’s highlights:

* Transportation stocks again led the market decline on worries about higher interest rates’ impact on the economy. AMR, parent of American Airlines, fell 1 3/4 to 53, Delta dropped 1 1/4 to 44 1/2 and Burlington Northern lost 1 to 49 1/2.

* Many industrial stocks weakened. GM lost 1 1/8 to 48 5/8, Monsanto dropped 1 3/4 to 81 1/8, Caterpillar sank 1 1/4 to 54 1/8 and Briggs & Stratton fell 2 1/4 to 72 3/4.

* Retail stocks also tumbled. J.C. Penney dropped 1 3/8 to 51 1/4, Dayton Hudson slumped 3 1/8 to 73 3/4 and Home Depot was off 1 to 42 5/8.

* Financial and utility stocks, which are most sensitive to interest rates hikes, were mixed. The Dow utility index added 0.99 point to 176.84 after falling to a six-year low on Tuesday.

Among banks, Wells Fargo fell 1 5/8 to 149 5/8 but Chase Manhattan added 1 to 35 3/4.

* In takeover activity, electronics distributor Anthem Electronics surged 7 1/2 to 32 1/8 after agreeing to a buyout by Arrow Electronics.

Other tech issues were mixed. Software giant Computer Associates surged 2 3/4 to 45 after winning a court case over computer codes, and Dell Computer rocketed 2 5/16 to 38 7/16 on optimism about PC sales. But Intel eased 5/8 to 65 3/8 and IBM lost 3/4 to 69 1/2.

In other markets, the dollar eased to 1.545 German marks in New York on Wednesday, down from 1.553 on Tuesday. It also slipped to 97.65 Japanese yen, off marginally from Tuesday and near the post-World War II low of 97.50 set in July.

Overseas, London’s FTSE-100 stock index fell 22.5 points to 3,014.8 while Frankfurt’s DAX index added 0.54 point to 2,079.50. Tokyo’s Nikkei index rose 48.11 points to 19,885.38.

In commodities trading, October gold futures added marginally to Tuesday’s gains, up 50 cents to $394.60 on the Comex.