We are only 10 days away from the biggest day in the Lunar calendar – the Lunar New Year or the Chinese New Year.

With the Chinese New Year on 14 February, also commercially known as the Valentine’s Day, we usher in the Year of the Tiger – a year that many feel is not a great year simply because the Tiger is known for its ferocious nature.

As we bid farewell to the Year of the Ox, we can conclude that the Ox has brought lots of joy to the stock market although it started off with a brutal correction and will probably end the year on a “not-so-sweet” note. After a brutal selloff throughout the entire month of February 2009, global stock markets rallied without a meaningful correction from March 2009 to January 2010.

For the past month or so, we have had nothing but wave after wave of selling that occurred because the Chinese government seems adamant in putting China’s property back into place while President Obama’s obsession with hammering the US banking sector spooked investors.

All in all, most global indices lost anything from 7-10% during the correction that everyone has been waiting for.

From its peak of 10,729 to the recent low of 10,043, the Dow Jones Industrial Average (DJIA) lost some 700 points or 6.4%. The S&P 500 – a broader measure of the US stock market – fell from 1,150 to 1,071, around 80 points or 6.9%.

Over in Asia, the Shanghai Composite Index (SSE) plunged from 3,306 points in January to a low of 2,890 points on 3 February – a total of 416 points or 12.6%. The Hang Seng Index (HSI), too, dived 12.5% from 22,671 to 19,845. If we were to take into account the previous high of 23,099 on 18 November, then the HSI would have lost 14.1%.

The Nikkei 225 shed a mere 7.7% while the Straits Times Index (STI) lost 8.2%, falling from a high of 2,947 to a low of 2,706, holding on to the psychological 2,700-support.

Does The Tiger Bite?

If we were to look at past Years of the Tiger, we would be able to refer to the track record of the stock market in these years – 1986 and 1998.

The Year of the Tiger began on 9 February 1986 and the local index rose from 508 points to 530 points before retreating to 456 points in April. The index then went on a super Bull Run to reach a high of 1,288 points on 12 August 1987 – a 16-month rally that almost tripled the index.

The 1986 Bull Run happened a year after the 1985 Pan Electric crisis.

The “Tiger” arrived on 28 January in 1998 – the year after the 1997 Asian financial crisis – and the STI (formerly known as the Straits Times Industrial Index) rose from Chinese New Year in late January to mid-March before crashing for the next six months to September.

After September 1998, where the STI crashed to only 800 points, the index rallied strongly to a high of 2,582 on 3 January 2000. This Bull Run, popularly known as the Internet bubble, lasted 14 months and saw the index jump more than three fold.

While two cycles of the Year of the Tiger cannot be relied upon to provide empirical evidence to suggest that 2010 will see the start of another strong rally, we must remind ourselves that the current rally has already lasted some 10 months before correcting.

In past Years of the Tiger, the stock market has tended to correct at the beginning before staging a strong comeback. If we were to rely on such a trend, then we have reason to believe that the STI can rally very strongly after this correction.

Both Bull Runs that started in the Year of the Tiger – in 1986 and 1998 – lasted into the Year of the Rabbit, an animal that runs pretty quickly and is more amicable than the Tiger.

Optimism Aplenty

There are, of course, plenty of reasons for us to be bullish about the rest of the year.

The Chinese government has once again reiterated that China’s economy will continue to grow by at least 8% in 2010. The Chinese government is still spending on infrastructure development, which means that it will continue to spend on resources.

Its ability to finally grow its exports in December 2009, after an entire year of downturn means that the external engine of its “twin turbo” motor looks likely to grow in 2010. China’s second engine – domestic consumption – continues to remain robust and everybody ranging from analysts to economists and laymen are bullish on the consumer sector.

The US economy, meanwhile, grew 5.7% in the fourth quarter of 2009, beating estimates by a mile. Moreover, the private sector cut only 22,000 jobs in January 2010, the lowest since February 2008. These are signs that the US economy is finally showing clear signs of getting out of the woods, which ultimately leads to jobs growth and stronger consumer spending.

With interest rates remaining low and plenty of liquidity sitting at the sidelines waiting to pounce on buying opportunities, there are no lack of funds to push the stock markets higher.

Crouching Tiger Hidden Danger

With the Tiger “crouching” just around the corner, these are signs that we must look out for.

Although we have proven that the past cycles of the Year of the Tiger have been favourable for the stock market, there are signs and warnings that things may just go out of hand.

Renowned economist Andy Xie has warned that China’s property sector is a bubble waiting not to burst, but to explode. He argued that too many people are buying multiple properties while the government’s decision to clamp down on borrowing may lead to defaults while excessive supply will depress rental yields.

China’s tightening may also affect its global suppliers, especially countries that supply the Mainland with resources and other raw materials that have been driving the commodities rally.

Over at the US, President Obama’s proposal to stop US banks from profiting from risky ventures such as engaging in trading activities will, if rubber-stamped by Congress, have detrimental effects. We are now very used to US political rhetoric, whereby words are often bigger than action. The President needs to pacify the American public after the financial institutions’ perceived abuse of taxpayers’ money.

While China is already at the tightening stage, the US has yet to even reach the full recovery stage and, thus, it is likely that we will have to wait for the US economy to get back on the growth path. At the same time, watch out for hints of China’s economy getting out of hand.

The irrational exuberance of Chinese investors and the hot money flowing into the Mainland is indeed worrisome.

However, with the low interest rate environment and improving economic fundamentals supporting the stock market, we can be slightly more confident that 2010 will continue to be good, although not as good as 2009.

After all, stock markets like to roar in the Year of the Tiger.