FINANCIAL MARKETS : Stock Prices Rise Again; Yields Drop

Stock prices rose Tuesday for the sixth time in seven trading sessions, spurred by renewed takeover activity and by a mild bond market rally.

The Dow Jones industrials gained 18.45 points to 3,917.30, the index’s first close above 3,900 since Feb. 22.

Analysts were encouraged that the rally broadened Tuesday after stalling somewhat Monday. The Nasdaq composite index of mostly smaller stocks rose 3.25 points to 766.45, a 0.4% gain that was nearly equal to the Dow’s advance.

On the New York Stock Exchange, rising issues topped losers by 13 to 8; volume totaled an active 295 million shares.

Stocks began their ascent early in the session, as bond yields eased after the Conference Board said its consumer confidence index slipped to 89.0 in August from a revised 91.3 in July.

The confidence index offered further proof that the economy’s momentum is slowing. The stock market’s rally since last Wednesday has been built on such data, on the assumption that more moderate growth will avert the need for higher interest rates.

Balanced against the drop in confidence was a report Tuesday showing that sales of new single-family houses surged 8.3% in July, the largest gain since February.

But that report failed to spook bond traders, and yields finished the day modestly lower. The 30-year Treasury bond yield slipped to 7.46% from Monday’s 7.49%.

U.S. bonds were also helped as the Federal Reserve Bank of New York purchased as much as $6 billion of Treasury securities to pump currency into the banking system, in a routine transaction.

In the stock market, meanwhile, bonds’ strength added to positive sentiment fueled by takeovers, real and imagined. A deal to combine Lockheed and Martin Marietta sent defense stocks surging, while drug giant Warner-Lambert soared 7% on renewed takeover talk.

“Everybody in the world is out there saying there will be more (mergers) in health care and more in defense,” said Robert Von Pentz, chief investment officer at Riggs Investment Management.

On a technical front, analysts note that many “short” sellers who had previously sold borrowed stock, betting on further price declines, must now cover their bets by buying stock in the open market--or risk unlimited losses if the rally continues. Such buying can help fuel the market’s gains.

The Dow is just a 1.6% gain away from its all-time high of 3,978.36 set Jan. 31.

Among the market highlights:

* Lockheed soared 10 3/4 to 76 3/4 and Martin Marietta gained 1/2 to 48 3/4 on news of their merger plans. Other defense stocks up sharply included E-Systems, up 1 5/8 to 42 1/2; Northrop Grumman, up 1 3/8 to 44, and Litton, up 1 3/4 to 39 1/4.

* In another big merger deal, General Signal agreed to buy Reliance Electric, sending Reliance shares up 5 1/8 to 25.

* Many commodity-oriented stocks continued to rise on optimism about the economy’s ability to stretch out its expansion at a moderate growth rate. International Paper surged 2 to 76 5/8, Reynolds Metals gained 2 to 54, Inland Steel jumped 1 5/8 to 41 1/2 and American Barrick gained 3/4 to 22 1/2.

* Tech stocks renewed their advance. Intel added 7/8 to 67, Apple gained 7/8 to 36 1/4, AST Research jumped 3/4 to 17 3/4 and Cabletron Systems surged 4 3/8 to 109 3/8.

* Among health issues, Warner-Lambert jumped 5 5/8 to 86 3/4 as takeover rumors resurfaced that pegged the company as a target of a European drug firm. Warner-Lambert declined to comment.

U.S. Surgical rose 1 1/4 to 25 7/8 on rumors that had the troubled company’s CEO stepping down. The firm had no comment.

In foreign markets, Paris shares fell after the nation’s major commercial banks raised their base lending rate to 7.95% from 7.70%, in a surprise move. The CAC index lost 14.90 points to 2,060.37.

In London, the FTSE-100 index eased 15.5 points to 3,249.6, while Frankfurt’s DAX index added 17.66 points to 2,210.85.

In Tokyo, the Nikkei index was off 8.3 points to 20,592.12.

In Mexico City, profit taking continued to clip stocks. The Bolsa index dropped 13.11 points to 2,732.84.