For the stock market, August was not supposed to be this way.

In a month mythicized as a dead period when the market takes a breath, leading barometers are dancing around records, stunning the most prominent prognosticators.

"Everyone I know, including me, thought August would be weak," said Bill Burnham, a leading Internet analyst who recently joined Softbank Capital Partners, an Internet investment arm of the giant Japanese conglomerate. "So it's quite surprising to see this rally."

The Dow Jones industrial average today topped Monday's record close before plunging, then climbed back to recover nearly all its lost ground. Pounded briefly by the Federal Reserve's quarter-percentage-point increase in short-term interest rates, the closely watched index of blue-chip stocks roared back, closing down just 16.46, or 0.2 percent, at 11,283.30.

"Trying to figure out what the market is going to do these days is like trying to figure out what a 2-year-old is going to do," groaned Cummins Catherwood, who manages a $650 million mutual fund. "It makes us all look really knowledgeable, doesn't it?"

The market has been slipping since mid-July--two weeks after the Fed's last rate boost. Strong economic signals triggered worries that the Fed would mirror the move at its meetings in August and October to cool growth. Higher interest rates make it more expensive for major corporations to borrow money to grow.

But signs abound that inflation is in check. And investors have becom fairly confident that the Fed will stop at just one more rate hike. "They're celebrating," said Marshall Acuff, chief market strategist at Salomon Smith Barney. "We've had a real revival in valuations in the last few weeks."

The party was already in full swing before the Fed took action today. On Monday, in anticipation of the rate increase, the Dow surged to a record 11,299.76.

Despite widespread confidence about the action, the market was rocked initially by the 2:15 p.m. announcement today. The Dow, trading at record highs, tumbled 172 points in 18 minutes as people sitting on the sidelines decided to cash out. The Standard & Poor's 500 index dropped 1.7 percent.

"There had been some people still holding out, thinking the Fed might do nothing," said Betsy Roselli, head equities trader at Black & Co. in Portland, Ore.

But just as quickly as stocks were unloaded, bargain hunters came out in full force, continuing a recent search for deflated Internet stocks and tech stocks. As many technology companies slumped recently, investors began buying them anew, again narrowing a market that had broadened when many Wall Street darlings became too pricey.

The renewed tech-buying boosted the Nasdaq by 32.68 points, or 1.2 percent, to 2752.25. The gains were helped along by Microsoft, which rose 5 3/4, to 92-3/16, after winning a round in court on a copyright dispute with Sun Microsystems Inc.

The Fed move pushed down the yield on the benchmark 30-year Treasury bond 5 basis points, to 5.93 percent--its lowest level in more than a month. Two-year notes dropped 7 basis points, to 5.59 percent. The action further weakened the dollar against the yen and euro, reinforcing a recent trend driven by expectations that international investors will shift money from U.S. stocks into Japan and other improving countries.

For now, investors' enthusiasm for U.S. securities is continuing. "The money is flowing to equities because it's still a relatively safe bet," said Joseph N. Cangemi, a senior vice president at Francis P. Maglio & Co. Inc., which trades on the floor of the New York Stock Exchange. "The downside risk is minimal, because inflation isn't really threatening the bottom line."

But some people believe that the celebration could be short-lived. Several figures are due out in coming weeks, including those measuring sales of durable goods and the growth of jobs. If they show strength, some market watchers believe, the Fed could raise rates in October.

"The market is not going to keep going straight up," Acuff said. "We're not out of the woods."