The unstated goal of the phonics test with the nonsense words is to make it impossible for teachers to cheat by having students rote-learn a bunch of high-frequency words. They can only pass by actually learning the grapheme-phoneme correspondances. It's a good thing.
But there is no sense in which that's a skill required for effective reading. English spelling and pronunciation have too many random corners for it to be anything other than a distracting academic exercise.
Recognising a bunch of high-frequency words is very much the foundation of reading.
Historically reading was taught by learning words with some very basic rules for pronunciation. It worked pretty well for a long time. But the pronunciation of non-trivial words - and some trivial words - has to be heard to be learned.
For example: it's not unusual for bookish people to mispronounce obscure words because they've never heard them. They know what the words mean, but the correct pronunciation just can't be worked out from the spelling.
The only way to learn it is to hear someone saying it.
Except that's wrong - there are rules to English pronunciation that work like 99% of the time. It's why most people would pronounce "ghoti" something like "go tee" or "go tie" instead of "fish".
Just because there are exceptions doesn't mean the rules are nonexistent. We're just rarely or never explicitly taught these rules.
As a parent with kids who struggled (actually, performed average) on these nonsense word tests, I do think that is bullshit. If you somehow manage to cheat and get your kids to recognize all the high frequency words they need to be fluent, congratulations, you have taught them to read.
Let's keep kids' achievement measures out of the cynical distrust of our teaching staff.
Edit: Yes, I am biased. And, TheOtherHobbes made better and clearer points than me in my sister comment.
