Don’t Let The Market Turn You Into A Pavlovian Investor

I want to explain to you how the market has been training investors, and potentially “setting them up,” for when we are finally ripe for the major bear market I expect to begin in a few years.  To this end, I have found some information on other websites about the Pavlovian response, so that we can understand how the market is training market participants.

During the 1890s, Russian physiologist, Ivan Pavlov was researching salivation in dogs in response to being fed. He inserted a small test tube into the cheek of each dog to measure saliva when the dogs were fed (with a powder made from meat).

Pavlov predicted the dogs would salivate in response to the food placed in front of them, but he noticed that his dogs would begin to salivate whenever they heard the footsteps of his assistant who was bringing them the food.

When Pavlov discovered that any object or event which the dogs learned to associate with food (such as the lab assistant) would trigger the same response, he realized that he had made an important scientific discovery. Accordingly, he devoted the rest of his career to studying this type of learning.

Based on his observations, Pavlov suggested that the salivation was a learned response. The dogs were responding to the sight of the research assistants' white lab coats, which the animals had come to associate with the presentation of food. Unlike the salivary response to the presentation of food, which is an unconditioned reflex, salivating to the expectation of food is a conditioned reflex.

Pavlov then focused on investigating exactly how these conditioned responses are learned or acquired. In a series of experiments, Pavlov set out to provoke a conditioned response to a previously neutral stimulus. He opted to use food as the unconditioned stimulus, or the stimulus that evokes a response naturally and automatically. The sound of a metronome was chosen to be the neutral stimulus. The dogs would first be exposed to the sound of the ticking metronome, and then the food was immediately presented.

After several conditioning trials, Pavlov noted that the dogs began to salivate after hearing the metronome. "A stimulus which was neutral in and of itself had been superimposed upon the action of the inborn alimentary reflex," Pavlov wrote of the results. "We observed that, after several repetitions of the combined stimulation, the sounds of the metronome had acquired the property of stimulating salivary secretion." In other words, the previously neutral stimulus (the metronome) had become what is known as a conditional stimulus that then provoked a conditioned response (salivation).

Pavlov's discovery of classical conditioning remains one of the most important in psychology's history. In addition to forming the basis of what would become behavioral psychology, the conditioning process remains important today for numerous applications, including behavioral modification and mental health treatment.

Now, I want you to consider whether investors have been trained in a similar way by the stock market over the last 10+ years.

For those of you who intimately lived through the 2008-2009 financial crisis, you would remember how that episode shook investors confidence in the financial markets to their core.  While not quite as bad as what happened to the stock market prior to the onset of the Great Depression (which is why we only call it the Great Recession), it is quite clear that the market pushed many investors out of the market, with many vowing never to return. 

In order to offset the effect of the 2008-09 financial crisis on the psyche of investors, the market would have to retrain investors into believing it is a mistake to ever exit the market, no matter how bad the decline.  And, I propose that the strong rebounds we have seen after each market pullback since 2009 is how the market is retraining investors in a Pavlovian manner.  Each time the market rebounds strongly after a bout of weakness since the 2009 lows only strengthens the conditioned response by investors that they must remain fully invested at all times no matter what happens.  And, if you read the comments to many of the articles out there, this has become the pervasive sentiment among retail investors. 

In fact, we have now gotten to the point that more and more investors are quite convinced that “buy-and-hold” is the best strategy for any market participant.  What this tells me is that the investor community has been trained rather well to expect that “the market always comes back.”  Yet, I think the market is setting up investors in the coming decade.

For those that have been following my work for years, you would know that, even though I was bullish in 2015, I was looking for the market to top out in the 2100 region towards the end of 2015, and provide us with a pullback in the market to the 1775-1800 region before setting up a rally to take us to 2600+.  And, as most analysts turned very bearish in 2016, I was calling for what I termed a “global melt up” in many asset classes across the world. Moreover, I continued to pound the table with the same expectation “no matter who got elected” in the November 2016 United States presidential election.

So, while the same patterns of sentiment that we track suggest this bull market rally will not likely end until at least the 3200SPX region, with the strong potential to see a blow off top into the 4000-4100 region as we approach 2022/23, I think the market is going to continue to train investors to have utmost faith in the “buy-and-hold” strategy as we head to those market heights in the coming years.

But, I want to begin my warnings to you know now.  If the market is training investors to maintain a strong belief in one perspective, you can be assured that this is not likely going to allow them all to profit.  Rather, I am foreseeing the potential for a rising yield deflationary event taking hold into the late 2020’s, and potentially for much longer.  In practical application, it means that I expect the SPX to drop to the 1800 region from the 4000 top we can strike in 2022/23, and that would be my minimum downside target. I will further discuss this perspective in upcoming articles on, but, for now, I wanted to at least lay the ground work for my general market perspective. 

Avi Gilburt is founder of