China plunge hits US stocks; What happens next?

Published Mon, Jan 4 201612:41 PM ESTUpdated Mon, Jan 4 20162:05 PM EST

The new year began with a big drop in the Chinese stocks, which dragged down U.S. markets with it. China volatility was among the biggest headwinds for U.S. investors in 2015, causing the S & P 500 to reach correction territory last summer as fears of an economic slowdown there hit shares of Caterpillar , United Technologies and Apple . If we're in for bigger trouble in big China, here are all the ways to trade it both on the short side and the long side, according to CNBC Pro's analysis of historical data using Kensho. First off, let's look at the short-term trading reaction historically in U.S. markets when stocks in China plummet. In the last decade, there have been 36 single trading days when the Shanghai composite dropped 5 percent or more, according to Kensho. On those days, U.S. markets take a sizable hit, with the S & P 500 posting a 0.8 percent loss on average. The sector performance is even more informative... Commodity shares get knocked the hardest with the SPDR Materials ETF (XLB) and the SPDR Energy ETF (XLE) posting average one-day losses greater than 1 percent when China's stocks drop significantly, according to Kensho. Tech and industrial shares also post big losses. All major sectors dropped in value so there are not many places to hide on the stock level. However, there are some alternative ETF trades that work on the long side. The iPath S & P 500 VIX Short-Term Futures ETN (VXX) , which tracks the fear measure CBOE Volatility Index, posts average one-day gains of 3.5 percent when China stocks slide more than 5 percent in a single day. The ProShares Short S & P 500 (SH) , which seeks to follow the daily inverse performance of the S & P 500, returns 0.8 percent on average during that U.S. trading day. And the iShares 20+ Year Treasury Bond ETF (TLT) adds about 0.1 percent, on average, as investors scramble into fixed income for capital preservation. Read More Santoli: Is it a resilient bull or creeping bear? Now let's look at a longer-term trade. If the 7 percent slide Monday in the Shanghai composite leads to another bear market — like it did back in August — there are many U.S. stocks you should try to avoid in your portfolio. CNBC Pro ran the numbers with Kensho and found there have been seven times in the last decade when China's stock market fell 20 percent or more in a month's time. The latest of these rapid bear markets was in June 2015. On those occasions, Alcoa is one of the worst performers, down on average more than 20 percent in one month. Ford , because of its big sales in the country, nearly enters its own bear market. Wynn Resorts takes a hit as its properties in China's gambling mecca Macau get less revenue. Technology stocks are not immune with Micron Technology and Level 3 Communications posting big losses. Our screen showed nearly every stock in the S & P 500 fell in one month when Chinese stocks entered a bear market. Read More The 2016 Dogs of the Dow If you want to protect yourself from a coming China bear market, there are some ETFs that should work, if history is any guide. The ProShares Short S & P 500 (SH) and the iShares 20+ Year Treasury Bond ETF (TLT) make this screen as well, posting one-month average gains of 6.7 percent and 2.2 percent, respectively. The big winner is not for the faint of heart. The ProShares Ultra VIX Short-Term Futures ETF (UVXY) leaps, on average, by nearly 50 percent when China's stock market enters bear territory. This is not a security for those with a low risk tolerance. It tracks two times the daily performance of the CBOE VIX index so it shoots higher when fear grips global stock markets. If you're not prepared to lose a lot of money on some of the days within that 30-day period then you should not buy it. Also, because of its use of leverage it is possible the ETF won't perfectly match two times gains in the VIX. Nonetheless, it pays off big if you have the stomach for it. Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.

Trader on the floor of the New York Stock Exchange.

Brendan McDermid | Reuters

The new year began with a big drop in the Chinese stocks, which dragged down U.S. markets with it.

China volatility was among the biggest headwinds for U.S. investors in 2015, causing the S&P 500 to reach correction territory last summer as fears of an economic slowdown there hit shares of Caterpillar, United Technologies and Apple.

If we're in for bigger trouble in big China, here are all the ways to trade it both on the short side and the long side, according to CNBC Pro's analysis of historical data using Kensho.

First off, let's look at the short-term trading reaction historically in U.S. markets when stocks in China plummet.

In the last decade, there have been 36 single trading days when the Shanghai composite dropped 5 percent or more, according to Kensho. On those days, U.S. markets take a sizable hit, with the S&P 500 posting a 0.8 percent loss on average.

The sector performance is even more informative...