  We empirically test predictability on asset price by using stock selection
rules based on maximum drawdown and its consecutive recovery. In various equity
markets, monthly momentum- and weekly contrarian-style portfolios constructed
from these alternative selection criteria are superior not only in forecasting
directions of asset prices but also in capturing cross-sectional return
differentials. In monthly periods, the alternative portfolios ranked by maximum
drawdown measures exhibit outperformance over other alternative momentum
portfolios including traditional cumulative return-based momentum portfolios.
In weekly time scales, recovery-related stock selection rules are the best
ranking criteria for detecting mean-reversion. For the alternative portfolios
and their ranking baskets, improved risk profiles in various reward-risk
measures also imply more consistent prediction on the direction of assets in
future. In the Carhart four-factor analysis, higher factor-neutral intercepts
for the alternative strategies are another evidence for the robust prediction
by the alternative stock selection rules.
