My next thought was to just have one encoder with a single index position and then attempt to use timers to strobe the LED at the right time. I'm not really sure if this would even work.
Sure it would. Just having a single index pulse (perhaps from a optical gate or magnetic pick-up could start your timing cycle, after that its just working out delays needed to display the number of characters for your POV. That is how the first POV displays I saw working in the late 70s using the first micros. Most everything can be done in software with just a hardware index pulse.
Lefty