Surging crude oil scared the bulls away Wednesday, ending a midday rally that initially overcame techs' weakness after some disappointing earnings guidance from

Cisco

(CSCO) - Get Report

.

Crude oil for September delivery surged to yet another all-time high of $65 a barrel, before settling up $1.83 on the day at $64.90, another all-time high. The latest trigger for the gain was a decline in U.S. gasoline inventories.

After touching an intraday high of 10,719.41, the

Dow Jones Industrial Average

(DJI)

finished lower by 21.26 points, or 0.2%, at 10,594.41. The

S&P 500

(SPX)

fell 2.25 points, or 0.2%, to 1229.13, off an earlier high of 1242.62. The

Nasdaq Composite

(NASDAQ)

lost 16.38 points, or 0.75%, to 2157.81 after earlier rising to 2185.91.

Advancing stocks bested decliners by 19 to 13 in

Big Board

trading, although volume of 2.2 billion shares was up from recent levels. Losers led winners 16 to 13 in Nasdaq trading, where 1.9 billion shares changed hands.

Oil shares were among the few to escape the afternoon pullback; the Philadelphia Stock Exchange Oil Service Index rose nearly 2% while the Amex Oil and Gas Index gained 1.4%. In addition to new highs in crude,

Unocal's

( UCL) shareholders gave preliminary approval for the company to be acquired for more than $17 billion by

Chevron

(CVX) - Get Report

. That's' after Chinese oil producer

Cnooc

(CEO) - Get Report

abandoned its offer to buy Unocal amid a political uproar from the U.S.

The market rallied in the morning and through early afternoon, continuing Tuesday's

post-Fed advance. The early gains were impressive, given that technology shares were weighed down by Cisco's lackluster earnings guidance, and oil prices already were surging.

But the Nasdaq, which led the major averages higher after the April lows, resumed its more recent trend of underperformance. Highlighted by Cisco's 6.9% decline on heavy volume, tech's fade ultimately dragged blue-chip proxies lower as well.

Tech's retreat is a logical development as the price of oil has continued to hit one new high after another, according to Jack Ablin, chief investment officer at Harris Trust. "Tech had no reason for advancing while energy prices were rising," he says. "The two can't sustain the same path for very long, and now we're seeing tech taking its rightful place at the back of the parade."

Energy prices act as a tax on economic growth, while the technology sector is very sensitive to economic conditions, he explained.

U.S. consumers seem so far to have withstood high oil prices, as mentioned by the

Fed

on Tuesday. And that's part of the reason why the economic growth outlook has recently been upgraded; that's also why the Fed is going to keep raising rates.

While inflation pressures may have remained low so far, the Fed wants to cool off home-price appreciation, which largely has helped consumers withstand surging oil prices.

At the same time, unabated U.S. consumption still supports global economic growth, most notably in Asia, and that sustains high oil prices.

So for Jim Paulsen, chief investment officer at Wells Capital Management, the strange conditions of today's economic world mean that even as oil keeps surging and interest rates keep rising, there's a case to be made for stocks to move higher.

"As long as the reason that

rates and oil go up is a strong economy, then stocks can move higher," he says. "What takes the yield of the 10-year bond to 5% may also take

the S&P 500 to 1350." (On Wednesday, the benchmark 10-year Treasury dipped 1/32 to yield 4.39%.)

Furthermore, the strategist believes that some in the market still are in the process of re-examining the strength of the U.S. economy after underestimating it previously. That provides a proverbial wall of worry for bulls to scale and ultimately enables further gains in the market.

But before rolling over in excessive optimism, the bottom-line, once again, depends on the resilience of U.S. consumers. Sales at department stores were disappointing in July; overall retail sales for that month will be released Thursday morning and should provide fresh clues on the state of the consumer.

To view Gregg Greenberg's video take on today's market, click here

.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

click here

to send him an email.