Forgive my ignorance, but would it not be quite easy to tell the algorithm not to short certain stocks?
What you should be wondering is what are some cases where there is absolutely no advantage to using a computer. Look up the story of "George Soros breaks the bank of England." Or Hedge funds shorting Volkswagen when it was the most expensive stock in the world. Only to find out that Porsche owns 75% of it.
"Hey look, these bank stocks are showing amazing relative strength on an overall down day. I better load up!" is a possible erroneous conclusion.