MSTR and the MSCI Question: What Backtesting Stocks Tells Us About Index Removal Impact

When markets react to major news, the real action often happens before the headlines. A comprehensive backtesting of stocks historically removed from major indices reveals a counterintuitive pattern: by the time official announcements come, the damage to stock prices is already mostly done. For MicroStrategy (MSTR), this insight becomes crucial as it navigates the uncertainty surrounding its MSCI index status. Our backtesting analysis suggests that even if MSCI removes MSTR from its constituent stocks, the negative impact may be far less severe than commonly feared.

Why the MSCI Index Matters: Trillions in Passive Stocks at Stake

To understand the stakes, you need to grasp just how much capital follows the MSCI indices. This isn’t simply a ranking system—it’s the benchmark that guides the allocation of trillions of dollars globally.

Consider the mechanics: Globally, there are trillions of dollars in ETFs (such as those from iShares and Vanguard) and index funds that mechanically track the MSCI US Index. When MSCI announces a removal, these passive funds face a hard requirement to sell. On the effective date—typically the close of trading at the end of the month—they must liquidate their holdings unconditionally, regardless of market conditions or price levels. There’s no discretion, no negotiation. The selling happens.

But the pressure extends beyond passive funds. Many actively managed funds operate under strict governance rules that limit them to holding only stocks within major indices. These funds become forced sellers too, magnifying the liquidity crunch. When both passive and active capital heads for the exits simultaneously, stocks experience a double blow: falling prices and evaporating liquidity, which typically forces down valuation multiples across the board.

The Backtesting Surprise: When Do Stocks Actually Drop?

Here’s where the data tells an unexpected story. Recent backtesting of stocks removed during MSCI’s November adjustment provides a clear timeline of price movement. In that round, companies including Whirlpool, Sensata, and ZoomInfo faced removal.

Three Distinct Phases Emerge From Backtesting Historical Stocks:

Phase One: The Anticipation Panic (100 Days Before Announcement) Smart money moves first. As deteriorating fundamentals and shrinking market capitalization signal that a removal is likely, informed investors begin to position accordingly. The backtesting data shows stocks facing removal averaged a -24.5% decline during this 100-day window. The market prices in the likely negative event through deteriorating technicals and growing selling pressure.

Phase Two: The Announcement Effect (Announcement Through Effective Date) This is where intuition fails most investors. When MSCI officially announced the removals in November, stock prices remained surprisingly stable. The average decline during this period was just -0.7%. Individual stocks told the same story: Whirlpool actually rebounded 2.1% after the announcement. Why? Because the negative information was already embedded in prices; the market had already voted.

Phase Three: Post-Removal Recovery (After Effective Date) Perhaps most striking, oversold stocks frequently recovered after the technical selling concluded. Sensata, for example, recorded gains approaching 10% in the post-removal phase. The forced selling created temporary dislocation that mean-reversion ultimately corrected.

What Backtesting Stocks Reveals: The average decline before announcement was -24.5%. The average decline after announcement was -0.7%. This 24x difference matters enormously for how we should think about MSTR.

MSTR’s Own Backtesting: A 51% Preemptive Decline

Applying this backtesting framework to MSTR itself reveals why current valuation might already reflect MSCI removal risk. In October, MSCI signaled it was considering removing MSTR-type stocks from its indices. What happened to MSTR? Its stock price fell 51% from its October highs—a decline far exceeding what Bitcoin experienced over the same period.

This 51% move bears the hallmark of the Phase One anticipation panic documented in our backtesting. The market has front-run the decision. If historical backtesting patterns hold, MSTR’s “biggest collapse” may already be in the rearview mirror, which fundamentally changes the risk-reward calculus for investors watching the January 15th announcement.

Nasdaq 100 Sends a Bullish Signal for MSTR Stocks

Before assuming the worst about MSCI, consider a critical data point: the Nasdaq 100 recently decided to retain MSTR as a constituent stock.

While the MSCI and Nasdaq 100 use different compilation methodologies, they share core DNA: both emphasize market capitalization and liquidity as primary gatekeeping metrics. The Nasdaq 100 represents the 100 largest non-financial technology stocks in the United States, with stringent standards.

The fact that MSTR cleared that threshold signals that—on hard metrics—the company hasn’t deteriorated to irreparable levels. Its average daily trading volume and free-float market capitalization still meet elite standards. This doesn’t guarantee MSCI will retain it (MSCI has industry classification considerations beyond pure metrics), but it suggests MSTR’s competitive position remains stronger than the removal debate implies.

Three Scenarios: What Backtesting of Similar Stocks Suggests

Based on backtesting historical patterns, here’s how the January 15th announcement might unfold for MSTR:

Scenario 1 (Most Likely): MSCI Retains MSTR If MSCI announces retention, history suggests this could be a major catalyst. Investors would reposition, and the stock could experience significant appreciation as removal uncertainty clears. Backtesting similar stocks shows strong rebounds when feared removals don’t materialize.

Scenario 2 (Manageable Risk): MSCI Removes MSTR Our backtesting analysis indicates the downside here is limited. The 51% decline already recorded suggests the market has largely priced in removal risk. Post-announcement moves average only -0.7%, and some stocks recover. While removal creates near-term selling pressure, the foundational driver of MSTR’s value—Bitcoin’s trend—remains intact.

Scenario 3: MSCI Delays Decision Ambiguity could create short-term volatility, but the fundamental analysis remains unchanged.

The Core Driver Remains Bitcoin’s Trend

Through all this analysis, one fact bears emphasis: MSTR’s ultimate trajectory depends primarily on Bitcoin’s direction, not on MSCI inclusion status. MSTR functions as a leveraged Bitcoin proxy—when BTC trends higher, MSTR tends to outperform. When BTC deteriorates, MSTR faces headwinds regardless of index status.

Conclusion: The Asymmetric Opportunity

What does backtesting stocks tell us? That negative news often gets priced into markets well before it becomes official. The “event” that scares headlines happens in silence, weeks earlier, as informed investors reposition.

For MSTR investors, this suggests a compelling asymmetric setup:

• Downside Risk: Limited, since much of the removal concern already manifests in the stock’s 51% decline. Backtesting shows post-announcement moves averaging under 1%.
• Upside Potential: Substantial, if the January 15th announcement retains MSTR, removing uncertainty and unlocking a relief rally.

The debate over MSTR’s MSCI status has hung over the stock like a sword of Damocles. The good news? Historical backtesting of similar stocks suggests the market may have already inflicted most of the damage. The January 15th announcement might not bring the crash everyone fears—or it might bring the surprise rally that rewrites the narrative. Either way, the data points toward an opportunity worth examining.