i know an oscilloscope would be a better indicator but unfortunately i do not have one. If I turn the encoder real slow the multimeter will jump up and down. the I0 and I1 do not change with just the encoder hooked up. I can get I0 to count if i also jumper from the + volts to I0 and I1 and remove the jumpers alternately. The jumpers will not count if the encoder is not connected.
I have also tried setting I0 to Counter and get the same results.
I have 2 different encoders that I have tried.
Dynapar model 2112 5 - 26 V out, 6 pin here is a link to the manufacturer current model. the wire leads are labeled from the manufacturer with +, Common, Sig A, Sig B and Shield so i hooked it up http://www.dynapar.com/Products_and_Solutions/Series_21/22_QUBE_Encoder/
BEI model H20DB-25-SS-100-A-3904R-SCS18-5V-S http://www.beiied.com/PDFs2/H20_Incremental_Encoder.pdf