China sneezes and U.S stock market catches a cold

Commodity stocks such as Freeport McMoRan and Alcoa are the U.S. stocks that are most closely linked to the China growth story, as evidenced by their nearly one-to-one correlation so far in 2010 to a China exchange-traded fund.

The Materials SPDR ETF (XLB), comprised of Freeport and other producers of raw materials, and the iShares FTSE/Xinhua China 25 Index (FXI), made-up of the biggest China ADRs, have a correlation of 0.8 in the first half of the year. Meaning, when China stocks move, raw materials shares move in unison 80 percent of the time.

The China ETF, Freeport, Alcoa, and Caterpillar, which helps commodity firms dig out the raw materials, were all pounded today after the U.S.-based Conference Board revised its April Leading Economic Index for China way down to a 0.3% growth rate, instead of 1.7 percent gain. While this measure is a new creation by the Conference Board and not yet widely-followed, it raised enough concerns for jittery investors ahead of China’s official purchasing managers’ index out Thursday.

"The response to a less important leading indicators figure tells me the market already knows something,” said Tim Seymour, founder of and a ‘Fast Money’ trader. “We saw this last month where the market had whisper numbers on China exports and retail sales. A contraction in China’s PMI would not surprise me."

But the correlation works both ways, if China is able to cool its property market without snuffing out the rest of its economy, these will be the names that get the very biggest bang for your trading buck on the way back up.

"The China story is not dead when you look at longer-term metrics that show China is still going to grow four times as fast as the U.S.," said Jon Najarian, co-founder of and "I wouldn’t be buying here because quarter-end selling and other factors are at work. But as soon as the market stabilizes, I would be buying back these very same names that are getting hurt the most today."

The ETF with the least correlation to China is the Consumer Discretionary SPDR ETF (XLY), according to the correlation tracker tool on . The ETF contains stocks like Target and Home Depot, which largely depend on the U.S. consumer.

For the best market insight, catch ‘Fast Money’ each night at 5pm ET and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC. 

John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team

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