Good question!

The short answer is the best sign is a "mama's intuition"

, but the long answer at least for what I look for when it comes to phonics readiness is...
*Dc can sing the alphabet fairly well (except for "ellamopie" - "l", "m", "n", "o", "p")
*Dc know almost all of the their letters and at least a few sounds.
*You can see dc are making the connection between written words and spoken language (i.e. they begin to understand that all those letters in a book turn into words that can be read, they also understand the the basic way words are read: rightside up and left to right, they open a book right side up and turn pages the right way, etc.).
*You can see your dc are recognizing when you are reading something, noticing letters all around them (i.e. on signs), and maybe even start to ask "what does that say?" when they see something written.
*You may even see your dc begin to put sounds together with letters at the beginning of words first, then begin to recognize them in the middle and end of words.
As far as writing readiness...
*Dc can verbally say their letters and visually recognize them
*Dc can begin to properly hold a big pencil (i.e. Tinconderoga pencils)
*Dc can roughly make some letters
*Dc can begin to write their name
*Dc can make fairly straight lines as well as curved lines
*Dc have enough fine motor skills to do fairly well tracing dotted letters you've made for them
*Dc can begin to connect dots to form letters (if you draw the dots at the "vertices" of letters)
We have generally found our dc are ready for phonics and beginning handwriting when they have completed LHTH, as they know all of their letters and 1 sound for each of them, and they also have learned beginning fine motor skills. The Leap Frog DVD's and singing the ABC's while pointing to each letter on a placemat are 2 other simple things we do to get our dc ready for phonics. We also encourage coloring using the Kumon books. We usually begin phonics around 4 to 5 years of age, and then do 2 years' worth of phonics. We begin writing instruction with LHFHG around age 5 or 6. Of course this is just the way our family has gone about it, and many different roads lead to good reading abilities!

HTH as you consider what you'd like to do!
In Christ,
Julie