I think it's just mindless fantasy. Some girls, gay guys or maybe even FFVII haters see that Sephiroth has some minor feminine qualities and jump into a fantasy world (double fantasy considering FFVII is fictional to begin with) where abstract things happen.

I see it in the same way some guys fantasize about lesbians, they like to imagine the action (or possibly the odd connection) but in practicality it wouldn't really happen the way they hope (if they were lesbians what makes you think that a guy could have any part in it?)

I don't think its ignorant at all to not understand why people make these fan fictions. They really only appeal to people who want or like to believe these things could happen but it never would (for so many reasons).

Unknown Entity mentions the whole confusion of Clouds personality which makes sense in a long stretch but really none of it has to do with sexuality its all PTS and genetic experimentation which would mean that even if it did happen, it would only be because Cloud was warped, not because its his natural inclination. All this even happened after Sephiroth went all "Love my mother, kill my father" so even Sephiroth has his own issues.

Again it really only makes sense to people who like that stuff so I don't know for sure. It's easy enough not to see much of this if your not looking for it.