Financial services stocks surged on Wednesday amid an explosive rally in the general market.

Credit card companies were among the leaders, buoyed by signs that credit quality is improving.

The Dow Jones industrial average gained 233.78, or 2.51%, to close at a new record of 9,544.97. Analysts attributed the action to investment of yearend bonuses into mutual funds.

The Standard & Poor's bank index was up 2.39%, with some big banks posting much larger gains. Citigroup was up $3.125, or 6.1%, to $54.375. BankAmerica Corp. rose $3.0625, or 4.99%, to $64.375. And J.P. Morgan & Co. climbed $3.875, or 3.61%, to $111.25.

Among card companies, Capital One Financial Corp. shares surged 5.04%, to $124.9375, after a usually bearish analyst raised his recommendation on the company.

Credit card analyst Gary J. Gordon of PaineWebber Inc. upgraded the Falls Church, Va.-based credit card specialist to "buy," from "attractive," because business operations of the company have improved.

Providian Financial Corp. and MBNA Corp. also rose dramatically as investors were emboldened by indications that the economy was improving.

Mr. Gordon has had one of the darkest outlooks on the credit card industry of any analyst on Wall Street. His pessimism about subprime lenders proved correct as stocks of those companies were battered by heavy chargeoffs and other business reverses that drove some over the precipice of bankruptcy.

Mr. Gordon's bearishness about consumer credit industry prospects was reinforced in 1997 when chargeoffs for credit card companies swelled. According to Fitch-IBCA, chargeoffs for the industry reached a high of 6.93% in April 1997. They fell to 6.27% in November.

"I was honestly surprised that the chargeoffs came down," Mr. Gordon said. "I thought it would keep going up because of their aggressive marketing. I was wrong."

Capital One earned the upgrade because of its improving credit quality, robust growth, and enhanced collection efforts, the analyst said. Mr. Gordon expects Capital One's chargeoffs to fall to about 4.5% in the fourth quarter, from 6.7% in the third quarter.

Capital One's delinquency rates will probably be flat or down in the fourth quarter, even though this is a time when delinquency rates increase, the analyst said.

Mr. Gordon said that considering Capital One's marketing budget of $700 million, he expects Capital One to add nine million accounts in 1999. "If they didn't spend that much on marketing, their earnings would be higher," he said. "Still, they are really aggressive about adding customers-very high credit quality customers."

Some hurdles remain for Capital One, however, according to Philip R. Grennan 3d of Business Dynamics Consulting, a firm specializing in the payment services industry.

"Credit cards are clearly the cash cow for the company's other ventures," Mr. Grennan observed. "How the company's profitability and efficiency in credit cards translates into their other ventures remains to be seen. The company has given little indication about the profitability of their other ventures."

And Mr. Gordon has not shed all of his bearishness.

"I still don't think we are out of the woods yet as far as credit quality," the analyst said. "There is still the possibility of recession down the road."

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