A crimson tide of sinking stocks swept the casino industry Tuesday, including double-digit percentage declines for giants like MGM Mirage (NYSE:MGM), Las Vegas Sands (NYSE:LVS), and Wynn Resorts (NASDAQ:WYNN).

The industry was hit by soft numbers in a third-quarter report from Wynn, whose stock fell 11%. Boyd Gaming (NYSE:BYD), whose stock dropped 17.8%, reported third-quarter earnings and revenue below the year-ago period. WMS Industries (NYSE:WMS), which makes and sells slot machines and video lottery terminals, watched its stock get pulled down with those of its customers.

By midday Wednesday, most casino and gambling technology stocks were falling into the red, although not at Tuesday's double-digit depths. Still, some of the big boys were getting hammered badly.

How short is the short term?
For investors, the question is whether Tuesday's decline represented sector rotation, a Wall Street term that reflects a portfolio manager's urge to grab profits while he can and move cyclically to new industries as he sees fit. Or is there a deeper concern that the economy and the casino industry aren't recovering as quickly or robustly as casino executives had hoped?

In an industry where investors can respond quickly to rumors as well as reality, the simplest explanation is that they reacted to several events in the context of previous huge run-ups for major stocks.

Among stocks that have soared since March but since come back down to earth, Wynn closed on Tuesday at $56.13, compared with a Sept. 29 close of $73.25. Las Vegas Sands, which issues third-quarter results on Thursday, closed at $14.31 on Tuesday, down from a $19.27 close on Sept. 22.

Several casino operators, including MGM Mirage and Boyd Gaming, have slipped into single digits again. Pinnacle Entertainment (NYSE:PNK) also has returned to single digits, joining Melco Crown Entertainment (NASDAQ:MPEL) and Isle of Capri Casinos.

Confidence? Exuberance? Whistling past the graveyard?
Casino executives continue to approach the economy with a mix of caution, optimism, and their desire to expand their empires. "All things considered, this isn't as bad as it might have been," Steve Wynn told analysts on Tuesday.

When Boyd Gaming issued its financial report Tuesday, it said economic conditions have caused it to postpone for three to five years its already suspended Echelon casino/resort/retail project on the Las Vegas Strip. However, it still wants to buy all or some assets from bankrupt Station Casinos. "We continue to believe in the long-term viability of the Las Vegas market," CEO Keith Smith said Tuesday.

As casino stocks sank Wednesday, there were a few green shoots of optimism -- or at least opportunism -- among the sea of red stock symbols. Some experts were saying now is the time to buy. One analyst upgraded Wynn, while another upgraded Boyd Gaming.

Given the industry's recent volatility, investors might feel like flipping a coin.

Fool contributor Robert Steyer doesn't own shares of any companies cited in this story. Melco Crown Entertainment is a Motley Fool Global Gains pick. The Fool has a disclosure policy.