Why I'm not shorting the stock market anymore

There is some concern that the stock market is nearing the type of peak last witnessed in 2007 and 2000, and that we're due for a historic pullback — or many years of subpar returns. I think that this time is different — and that the environment today is not remotely the same as it was during those market peaks.

True, at the beginning of April, Iwas still calling for a 10- to 20-percent correction. But I have always thought that it was a short-term correction in a longer secular bull market. And I believe the recent correction in stocks that pushed the Nasdaq down nearly 10 percent, peak to trough, and selected tech and biotech stocks down between 10 and 30 percent, may well have run its course.

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Traders on the floor of the New York Stock Exchange.

As a result, I have pruned the hedges in my portfolio and am no longer short the S&P 500, nor the Nasdaq, as protection against further declines.

The reasons cited for a coming pullback have included everything from rich valuations to the latest tech bubble. But I think there are times when one must distinguish between absolute and relative valuation metrics, before making such a portentous call that the market is overvalued.

Market valuations

It is true that stock-market valuations are stretched, with the price/earnings ratio on the S&P 500 at roughly 18X earnings. Prior peaks have been anywhere from 18-25X earnings, before the market suffered an important setback. However, at prior peaks, there were several other factors that accompanied stretched valuations. The most important has always included rising inflation that prompted multiple interest-rate hikes by the Federal Reserve.

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And while it's true that the Fed is "tapering" its stimulus program, it is far from tightening monetary policy in such a way that would hurt stocks.

One rule of thumb to gauge overvaluation in stocks is to subtract the prevailing inflation rate from 20 to get a fair-value P/E. With the Fed's preferred measure of inflation, the personal-consumption expenditure deflator, (PCE deflator) running at just under 1 percent, a fair market P/E is about 19.

The Fed factor

If, indeed, inflation were set to take off and the Fed followed with a meaningful round of rate hikes, then I would agree that the market is in imminent danger. Fed ChairJanet Yellen has said that the Fed will not be raising interest rates unless, or until, the unemployment rate approaches 5.2 percent to 5.6 percent and inflation rises above 2 percent. That may be anywhere from a year to 18 months away, according to the Fed's best estimates.

Prior to the stock market's peak in October of 2007, the Fed raised interest rates 17 consecutive times in the previous 18 months, deflating the credit, real-estate and stock-market bubbles, simultaneously, and leading to a 50-percent plunge in stocks that lasted until March of 2009. Similarly, prior to the bursting of the Internet bubble, the Fed raised rates aggressively until the bubble burst.

Both bubbles, one could argue, may have collapsed under their own weight, but in my study of market history, it takes more than tapering to kill a secular bull market, which is what I believe we are experiencing today.

Years ago, one of my best sources,hedge-fund investor, Stan Druckenmiller (Soros Management, Duquesne Capital), who sports one of the best investment records in market history, told me that his extensive analysis of the stock market showed that only two factors precipitated bear markets: rising interest rates, or the onset of war. Clearly there is a risk that the Russian/Ukraine conflict is slipping out of control and could lead to military action between them, and involve both the U.S. and Europe. But unless this conflagration rises to the level of a global military conflict, it will most likely increase the volatility of the financial markets, not usher in a Russian bear. (If one is worried about Russia precipitating not only a war, but also a major market pullback, I would suggest hedging with oil and gold, by using USO, the long-oil ETF and the GLD, the most popular gold ETF.)

Thus, looking at relative, rather than absolute, valuations is a more appropriate way to gauge whether or not we are at an important market peak.

The "average" stocks went nowhere from 1998-2008, a period some of us believe to be a secular bear market, from which we only began to emerge in March of 2009. Secular bull markets can last 15-20 years, suggesting that this current move in stocks may have another 10-15 years to go, although there will be some nerve-wracking interruptions between now and then.

My case for a secular bull market rests on my strong outlook for the U.S. economy, based on a variety of factors, including the energy revolution, technological innovation and the real-estate recovery.

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The tech bubble

As for the increasingly popular argument that tech stocks are in a bubble, if they are, it is a mini-bubble at best. Selectively, it may be an accurate observation to say that tech, social media and biotech stocks have recently reached extremes.

The market for these stocks was frothy, in many cases, but some of that froth was worked off in the recent correction. This period of asset inflation, however, lacks the requisite characteristics that define a true bubble.

Unlike their 1990s counterparts, these richly priced stocks today, by and large, do have revenues and profits -- companies like Facebook, LinkedIn, Google, Weibo and Alibaba. Many of the 90s darlings did not, and used the proceeds of their IPOs to advertise products, or services, that were not even yet fully developed, or they used their high-flying stocks to acquire other vaporware that was on the market.

The market today, also, is far more discerning and isn't falling all over itself for companies like Groupon, Zynga and King Digital that have not delivering on their potential. This type of differentiation was absent in the 1990s.

Most of the hot dot-com stocks today are in a mini-mania, but not a flu-blown history-making bubble. The biggest reason of all — and it is important — is that there is no public mania for these stocks. They are not universally loved by the investing public. The subjects of the recent bout of speculation are hardly the stuff of cocktail party conversation, as was the case in the 1990s.

The last marginal buyers, individual investors, are not playing. Indeed, if they own too much of anything, it's bonds, not stocks. And one of the key characteristics of a bubble is not only the universal (read: public) love of an asset class, but also the accompanying belief that the mania will go on forever. Individual investors, twice burned, thrice shy, are not involved in this, largely, professional mini-bubble in tech and biotech.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. He also delivers a daily podcast, "Insana Insights," and a long-form weekly version, both available on iTunes and at roninsana.com. Follow him on Twitter @rinsana.