Rotation sensor - noise reducing
This is normal behavior for most of mechanical encoders (rotation sensors). Similar problem is met when using switch connected to microcontroller pin. 

Solution? Use simple debounce circuit (capacitor + resistor), more complicated debounce circuit (buffer/gate with Schmidt input) or create debounce code.

When touching the shaft there is a chance the encoder is on the edge between on and off, so it can give 'false signals' or just toggle between 1 and 0. Good debounce code should eliminate the mess.