Need to Know: This strategist warned investors not to chase momentum at the top. Now he says its time to be a...

Michael Darda, chief economist and market strategist at MKM Partners, was no fan of the stock market when it was registering record highs. Blinded by liquidity and false expectations of the proverbial Fed put, we fear that some investors are chasing momentum into the graveyard, he warned in early December, when the Nasdaq Composite was some 28% higher.

So its worth noting that Darda is far more optimistic now. He points out market-based indicators of inflation risk have rolled over hard. Industrial metals are down more than 25% from their highs, energy is on the edge of a bear market, and the dollar DXY, -0.17% has risen by double-digits year-to-date. The gap between the 10-year Treasury yield and the 3-month Treasury bill rate has compressed to just under 90 basis points. This is a sign that a previously behind-the-curve Fed is catching up. Yet, the focus seems to have suddenly shifted from open-ended inflationary overshooting to hard landing/recession, he says.

A monetarist model is also suggesting tighter monetary conditions, he says, noting the growth in broad money has essentially flat lined, and commercial bank deposits are meandering in a sideways trajectory.

The stock market, he adds, has essentially priced in more than two-thirds of a recessionary/bear market outcome already, with the S&P 500 down as much as 24% from its highs, and the forward multiple down nearly five points over a six-month span. When the multiple has contracted by four points or more over a six-month span, the S&P 500 climbed by double digits in the next 12 to 24 months.