NEW YORK (Dow Jones)--The recent winning streak for two beaten-down casino stocks was a classic case of what some traders suspect happened on a grander scale during the 28% rally for the Standard & Poor's 500: a short squeeze.

Shares of Strip giants MGM Mirage and Las Vegas Sands, owner of the Venetian casino, are both more than 90% from their peaks in 2008. During recent boom times, both loaded up with debt to build glistening developments that helped Vegas transform from seedy "Sin City" to a desert Monte Carlo. Now, Vegas's premium-price reputation makes it anathema to recession-struck tourists, and the casinos' debt loads are threatening to bust the companies.

This week, money manager Colony Capital LLC has broken off talks about an investment with MGM Mirage. The casino operator must come up with alternative financing for its $13.5 billion in debt, and to fund payments on its City Center project, an $8.6 billion development on the Las Vegas Strip.

Gambling, like liquor and cigarettes, was once thought to grow in popularity when times got tough. But gambling is no longer the only game in town. Data from the Nevada Gaming Commission shows that non-gaming revenue - think breakfast buffets and top-dollar suites - exceeded gaming revenue on the Strip in 2007.

Betting on red for Vegas is almost as dangerous as betting it will be in the black, however. Indeed, action in Sands and MGM Mirage has come to resemble a high-stakes game of "All-In" poker. Las Vegas Sands has more than tripled in value (to $4.44) and MGM more than doubled (to $5.30) from their March lows, when investors had effectively priced in a bust. Some short-sellers likely lost their shirts during those rallies.

Roughly 23% of Las Vegas Sands' float and 30% of MGM's were recently on loan to short sellers who borrowed it in the hopes of a fall, according to shortsqueeze.com. When an event - such as MGM's tentative deal with Colony Capital on April 1, when it closed at $2.63 - causes a stock with a large portion on loan to tick up, it can cause a stampede of buyers. That's because short-sellers lose money every time the stock ticks a little higher. Every tick prompts another short-seller to cut their loss by buying the stock. And every purchase of the stock causes another tick higher.

Outstanding short positions in New York Stock Exchange issues rose by 11% in the first half of March, suggesting that short-sellers buying back stock played some role in the recent rally beyond the action in the casinos. That's one reason some investors expect another dip for the market once the short covering is done.

One reason people may not be flocking to Vegas: they can have the same thrills and spills just watching their stock investments.

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