FINANCIAL MARKETS : Profit Taking Sinks Market; Dow Off 22.38

NEW YORK — The stock market fell sharply Monday as investors squeezed profits out of the market after it rallied last week to the highest level since the October, 1987, crash.

The Dow Jones index of 30 industrials closed at 2,584.98, a loss of 22.38.

The index of 30 blue chip stocks surged 31.87 Friday to 2,607.36, a 22-month high, when the expiration of some stock options and futures touched off a buying spree.

“On the Monday after options expirations, the market typically shows some weakness,” said Brian Luedtke, market analyst for Piper Jaffray & Hopwood.

Losers outnumbered gainers by about 9 to 5 in nationwide trading of New York Stock Exchange-listed issues, with 942 down, 532 up and 507 unchanged.

Big Board volume totaled 136.26 million shares, down from 174.88 million Friday.

The stock market headed down from the opening bell, and various market measures finished near their lowest levels of the session after an afternoon rebound ran out of steam.

“A lot of last week’s activity was predicated on the futures and options expirations,” said Eugene Peroni, director of technical research at Janney Montgomery Scott Inc.

Attention has returned to the interest rate outlook. Financial markets have been building up their hopes for the Federal Reserve Board to make a significant move toward a more generous credit policy, but so far they have been disappointed.

“The market must now consider that the Fed and the major commercial banks have not acted as aggressively as was hoped,” Peroni said.

Earlier this month when Chase Manhattan Bank cut its prime lending rate to 10.5% from 11%, it was widely assumed that its competitors would follow suit. But other major banks have demurred.

Among the stocks bucking the downtrend were Honeywell, which climbed 3 7/8 to 89 3/8, a 52-week high. The company, which has been mentioned lately as a possible takeover target, announced a major restructuring program that includes buying back about 10 million shares of its common stock and selling a substantial portion of its stake in Yamatake-Honeywell.

Warner Communications also finished on the plus side and was the most heavily traded NYSE-listed stock, as more than 4.7 million shares changed hands. Warner rose 1 5/8 to 67 1/8 after the Delaware Supreme Court upheld a lower court ruling allowing Time to proceed with its $14-billion tender offer for Warner. Time fell 1 to 137 1/2.

Paramount Communications, which dropped its $12.2-billion hostile bid for Time after the court’s ruling, rose 1 7/8 to 59 3/8.

Losers among the blue chips included McDonald’s, which sank 2 3/8 to 29 1/8. Securities analysts were unimpressed by the fast-food restaurant company’s second-quarter earnings.

Also contributing to the decline in the Dow was Eastman Kodak, which dropped 7/8 to 47 7/8. The company said its second-quarter earnings will be reduced by about $225 million because of a previously announced restructuring.

Exxon lost 1 5/8, falling to 45 1/8. Its second-quarter income plunged more than $1 billion because of costs associated with the Alaskan oil spill.

Among stocks mentioned recently as possible takeover candidates, Holiday Corp. jumped 3 3/4 to a 52-week high of 62 1/2.

Japanese investors applauded Prime Minister Sosuke Uno’s decision to resign Monday, as Japanese stocks rose after a widely expected election defeat for the Liberal Democratic Party and the unexpected resignation of its leading politician. The 225-share Nikkei index advanced 193.90 to close at 34,093.33.

Stock prices in London surrendered a portion of their recent gains as the market experienced a technical correction after its sharp move forward in recent weeks. The Financial Times 100-share index ended down 23.9 at 2,259.1,

Credit

Bond prices edged higher in quiet dealings, as traders awaited more evidence on the economy and interest rates.

The Treasury’s benchmark 30-year bond rose 5/16 point, or about $3 per $1,000 face amount. Its yield fell to 8.13% from 8.15% late Friday.

Kevin Flanagan, an economist for Dean Witter Reynolds Inc., said activity was fairly light as traders appeared to adopt a “wait-and-see attitude” before government reports later this week on durable goods orders for June and growth in the gross national product for the second quarter.

The government’s report Monday that it had a $7.79-billion budget surplus in June had been expected and had little impact on bond prices, he said.

In the secondary market for Treasury securities, prices of short-term issues rose 1/8 point, intermediate securities finished 3/32 point to 1/4 point higher and long-term issues rose as much as 3/8 point, according to the financial data service Telerate Inc.

A point equals a change of $10 in the price of a $1,000 bond.

The Shearson Lehman Hutton daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, rose 0.38 to 1,186.35.

In corporate trading, industrials edged up. Moody’s investment grade corporate bond index, which measures total return on a portfolio of 80 corporate bonds with maturities of five years or longer, rose 0.11 to 329.50.

In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds held steady. The average yield to maturity was unchanged at 7.20%.

The federal funds rate, the interest on overnight loans between banks, traded at 9.125%, unchanged from late Friday.

Commodities

Energy futures prices fell sharply on the New York Mercantile Exchange on indications that demand for crude oil products is declining while supplies remain high.

On other markets, copper prices were sharply higher, grain and soybean futures fell, livestock and pork prices finished mixed and precious metals were up slightly.

West Texas Intermediate crude oil settled 14 to 77 cents lower, with the contract for delivery in September at $18.74 a barrel; heating oil was 1.47 to 1.96 cents lower, with August at 49.70 cents a gallon, and unleaded gasoline was 1.31 to 1.39 cents lower, with August at 53.16 cents a gallon.

“A lot of selling was caused by reduced concern over the availability of gas and oil supplies out of the Soviet Union,” said James Ritterbusch, and analyst with Carson Petroleum Co. in Chicago.

The easing of the coal strike in the Soviet Union was expected to increase the availability of European energy products, analysts said.

The market was also influenced by news that workers in the North Sea oil field are calling off a work stoppage and expectations that today’s American Petroleum Institute report on oil stocks will show increased supplies.

Currency

The dollar fell against European currencies but rose against the Japanese yen, which was hurt somewhat by political instability in Japan.

The yen lost ground after the defeat of Japan’s Liberal Democratic Party and Prime Minister Uno’s announcement that he would resign.

Most of the money flowing out of yen went into European currencies, particularly the West German mark, dealers said. The dollar benefited less because of uncertainty about the future of U.S. interest rates, they said.

After climbing to nearly 1.92 West German marks in overseas trading, the dollar ended the U.S. trading day below 1.90 marks.

“There wasn’t a great deal of rhyme or reason to the dollar,” said John McCarthy, chief dealer at Amsterdam Rotterdam Bank in New York.

As for the Japanese yen, he predicted, “Until we see some kind of political resolution it’s going to continue to be weak.”

Gold prices were mixed. Republic National Bank of New York said gold bullion was bid late at $372.60 an ounce, up from $372.25 late Friday.

Despite the dramatic political news, the yen’s decline was slight. In Tokyo, it actually rose against the dollar compared to Friday’s levels. The dollar fell 0.20 yen in Tokyo to a closing 141.95 yen. Later, in London, it rose to 142.40 yen. In New York, it rose to 142.55 yen from 141.85 on Friday.

In London, the British pound was quoted at $1.6185, unchanged from late Friday. In New York, the pound rose against the dollar to $1.6260 from $1.6187.

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