The

Dow Jones Industrial Average

shrugged off a steep mid-session drop, rebounding to finish with a modest loss.

According to Wall Street traders, an unexpectedly strong

Beige Book

report sparked a sell-off in the bond market and led to several heavy selling programs. In the afternoon, the Dow industrials skidded to a session-low of 6367.41 before recovering to finish with a loss of 19.75 at 6422.94. The

S&P 500

dropped 3.18 to 745.10 and the

Nasdaq Composite Index

slipped 3.35 to 1297.02.

Bonds bounced from their lows, but lingering concern about Friday's November employment report should continue to rattle investors. Economists expect fewer new jobs than last month's 220,000. But tightness in the labor market could lead to sharper-than-expected gains in wages, economists said.

Smaller stocks continued to provide the shaky broader market with some support. The

Russell 2000

stock index of small-cap stocks edged higher as the market slid. The good movement in small stocks soothed some nervous minds.

"I don't think this is the end,'' said Byron Wien, chief U.S. strategist at

Morgan Stanley

. "Small caps tend to perform better toward the end of a bull-market run. Are we in the ninth inning? No. But it may be past the seventh inning."

Wien added that IPO traffic slows at Christmas, while inflows tend to improve, adding another seasonal boost to stock prices.

David Shulman, market strategist at

Salomon Brothers

opted to edge closer to the dugout than Wien. He trimmed his equity exposure to 45% from 50% in his model portfolio. He put 5% into cash, raising that position to 20%; the remaining 35% of the portfolio is in bonds. His argument: With the S&P 500 trading at about 19 times 1996 earnings, the stock market is too richly valued.

In the face of such trepidation, several stocks started bouncing off their early week lows.

Intel

(INTC:Nasdaq) jumped 3 + to 129 + after

SoundView Financial

, the influential technology research firm, upped its price target to 150. Other computer-hardware firms also rose.

Micron

(MU:NYSE) added 1 1/8 to 35 3/8,

Compaq

(CPQ:NYSE) gained + to 81 7/8, and

Hewlett-Packard

(HWP:NYSE) rose 1 + to 56 3/8.

IBM

(IBM:NYSE) fell 7/8 to 161 +.

Cisco Systems

(CSCO:Nasdaq) fell 2 1/8 to 63 +, continuing to stumble in the wake of hints that

Microsoft

(MSFT:Nasdaq) is moving into the firm's router bailiwick. Microsoft lost 1 3/8 to 153 +.

In blue-chip land,

Philip Morris

(MO:NYSE) jumped 2 1/8 to 105 + to help lift the Dow.

Oppenheimer

re-iterated a buy rating on Big Mo.

Airline merger chatter failed to deliver the goods, though arbs made some moves to snap up

Continental Airlines

(CAIB:NYSE) stock. Continental gained 2 3/8 to 30 +.

Delta

(DAL:NYSE), the potential suitor, rose a scant + to 75 +.

United

(UAL:NYSE), boasting about an improved 1997 outlook, climbed 2 1/8 to 59 7/8.

Value Line

(VALU:Nasdaq) jumped another 5 + to 46 +. Investors have poured into the stock in anticipation of a large one-time dividend that will be paid out as part of a ownership dispute settlement among the firm's founding family.

GT Interactive

(GTIS:Nasdaq) plunged 4 + to 7 7/8 after warning about profit problems.

A potential worry signal came from

Berkshire Hathaway

(BRK:NYSE). Mr. Buffett's stock is down $600 in the past two days to $32,700. The shares are well off their 52-week high of $38,000.

By Dave Kansas