Our son's "early reading" has kept me wondering "how" since the beginning.
He started reading words at two+ and would often "read" books. I quoted "read" because we never thought he was actually reading -- we figured it was just memorization, as he'd long been demonstrating a keen memory.
And then one day, shortly after turning three, he got a new book as a gift and promptly sat down and read it front to back. It was a 2nd grade book.
We were amazed and, naturally, had to try out this little guy's new found skills. He was reading just about anything we'd put in front of his face. He rarely, if ever, went through the process of sounding out words, and his fluency and expression were tremendous.
Where did this come from? We taught him the alphabet on the refrigerator, along with his name and things like that -- nothing else. We did read to him constantly, and he had a voracious appetite. Reading for a solid hour every night was common, if not typical. But how he made the connection between the spoken & written word is still a mystery. (We never followed along with our finger or anything like that.)
That's almost exactly our experience, too. Before (I think!) he could truly read, he used to recite long passages from his favourite books, with or without the book in front of him. My theory is that that memory, combined with an analytical gift that now shows up in maths, made it inevitable that he'd teach himself to read. He had a whole shelf full of Rosetta stones...
