Kyle now reads alot of sight words and many other random words on his own BUT he still guesses, not read! Yesterday he was reading a phonics book of Short U sound and when he saw TUG he read TIGER!!! Almost all the time he just guess without trying to really read what is written.
What can I do to help him?
My son does this when he is not really focusing. I usually gently remind him to look at the whole word and sound it out for him, while pointing at the word. He will get it don’t worry too much 
Remember that sight reading is not the same as reading phonetically. Children who sight read recognize patterns, not each letter. So the error of seeing “tiger” in “tug” actually is not that far off. The next step in your child’s education will consist of moving from “sight reading” to being able to decode words that he has never seen before. This involves phonics. The “guesses” that you’re experiencing with your little one are completely normal. I have been experiencing the same with my 3 y/o but she is definitely ahead of the learning curve when it comes to her sight reading level. Our next task is the phonetics. Hope that helps.
I think he’s recognizing the T and the G, and since he doesn’t know what “tug” is, he will guess the nearest thing that he knows, ‘tiger’.
It’s definitely still progress! Over time, as he sees more and more words that are alike, he should start seeing the difference between similar-looking words. For example, you could show him lots of “t” words, either from the Pattern Phonics sets, or compiled by yourself.
On the same note, at this time my dd is mixing up will and with, so I gently show her the last consonants. For us reading hasn’t been a smooth ride, it’s a step or two forward and a step back…
I have experienced this as well, and I am now. I try to break up the words with a little game that I have made. This helps with the phonics part as well. Also breaking words down and putting them together with an hands on activity helps as well. We use old lid tops, break the word down then build a word, have a sample ready for the child to look at. The show that I love for my kids to watch is Word World on www.pbskids.org my children love this. We build a word with big blocks, paper blocks, word tiles, old juice lids, foam shapes, etc.