Best practice for streaming video with quickly (2-5 sec) changing sources

There are several ways you can do this:

1) If you really want to just reduce buffer times, while continuing to switch clips manually, you can use the "2-phase buffering" approach that developers commonly use to reduce startup times. Just before you switch, set the buffer size to something very small (0.5 secs is common). This will allow the buffer to fill rapidly. When you get the buffer full status event, set it to something more stable, like 2 secs, or 5 secs. Note that there will always be a small gap in playback with this approach, but that may be acceptable for your app.

2) Use client-side playlists. You can add your short clips to the playlist using NetStream.play(reset=false). Each one will play in turn, with no gap in between. This is a very powerful technique, but it does require you to know somewhat in advance what clips needs to be added to the list. If you need to switch immediately, you'll still end up with a small gap in playback.

3) Flash Player 10, in combination with an upcoming release of Flash Media Server, will support a feature called "Dynamic Streaming" that will allow for seamless transitions between clips, with very little latency. This may not help you out right now, but be on the lookout for it!

It seems better than SMIL file to me.