More Bad News—Is It Time to Buy?

After one of the worst starts to any year in recent memory, talk of big opportunities and a second-half rebound is beginning to percolate on Wall Street.

The S&P 500 lost about 6 percent during January, the worst performance since 1990. With all that lost value, a few bulls are stirring.

The theory, care of the Wall Street Journal (subscription required), goes like this: Horrible earnings today could spell a sizable recovery in second-half results as healthier firms outpace the worsening opinions of equity analysts. Despite fourth-quarter earnings in the S&P falling nearly 20 percent, the financial and housing sectors are to blame for most of that drop. Healthcare, tech, and energy all showed solid gains. Last week the S&P roared back, thanks mostly to the Federal Reserve's massive interest rate cuts.

So will that mini-rally continue? Bears beg to differ.

Merrill Lynch's David Rosenberg says his team is "more than happy to take the other side of that debate," citing the 2001-02 period, which saw "no fewer than six" small, monthlong rallies during a bear market.

The problem is that any big earnings recovery later in the year is also predicated on an economic one. After January's dismal reports of falling employment and a surprise slump in the service sector, that's looking less likely.

Today, the Institute for Supply Management's nonmanufacturing activity index fell to 41.9 from 54.4, the lowest since the survey started in October 2001. All the index's components, from jobs to new orders, plummeted as well.

Still, if you believe the best time to buy is when there's blood in the streets, there's some agreement from one of Wall Street's most respected players. Financier Wilbur Ross told the Financial Times (subscription required) recently that the biggest names in "vulture investing," like Warren Buffett and Ron Perelman, might be ready to pounce on a host of battered investments.

Ross told the FT he's eyeing the monoline insurers, the latest sector to get crushed under the wave of the U.S. housing recession.

If they see value, the ice may be cracking.