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I believe the argument is that fund flows into index products creates the momentum effect. Once the funds reside in a cap weighted index fund, no further rebalancing is required, unless a company falls out/into the index.
I haven't seen a persuasive argument that creates *relative* momentum. New flows will buy the same percentage of every company's float, regardless of their price, all else equal it will affect their prices equally.
Obviously if price rises in the index beget flows then it can create *absolute* momentum in the index, but that is a very different claim, that couldn't explain the rapid price rises of TSLA or GME compared to other stocks in the index.
For a thought experiment. Imagine Apple1 and Apple2 are the same company with the same number of shares outstanding, but different market cap. By chance Apple1 is 5% of SPX, while Apple2 is 2% of SPX. Now passive fund investors are going to be buying 5% of one, 2% of the other.
Have a look at "liquidity cascades" paper. It has a nice chapter about how investors shifting from active to passive can create Momentum in large cap stocks.
P.s. I totally agree with your thread btw.
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