"the last two times we've been booted it's been on the back of intense shorting but no change in fundamentals, and the shorts have all closed after the rebalance and the price has climbed thereafter"
With respect, I think many here are misreading the market dynamic and coming to a false conclusion. Here it is in simple terms:
When the company previously got booted from the 200, all the 200 index-huggers were forced to sell their stock.
As an aside, this can be exacerbated when any stock falls out of the 200 and 300 at the same time (as has happened)
The 200/300 index-huggers (i.e. passive super) are the ones who lend out their stock. The lent-out shares have to be returned for them to exit their positions
This means those HF's who wanted to short the stock (likely due to their view it's too frothy or is cash-hungry etc) are forced to close their positions because the owner of the shares needs them back in order to exit
This is why the short positions naturally close out when a company falls out of the 200/300.
In other words, short positions reducing as a company gets booted from an index is a consequence, not necessarily the reason.
That said, shorts may indeed follow the momentum down when they determine a stock is likely going to be booted from the 200/300, in the same way that longs try to pick, in advance, which stocks will be added, and they front-run the demand from the passives who are forced to buy because of index inclusion. I know of some smart retail investors who play exactly the same long game (I have done this on one of my holdings and am betting the same eventually happens on two others). There is no illegal conspiracy here. It is just shorts - and longs - playing the momentum game.
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