First of all, let’s talk about what they are not. Signal graces are not a “sign” in the sense of when a prayer is answered, well, not necessarily. Strictly speaking, that is not what they are and especially they are not something created, but actually grace. Grace is the indwelling of God moving the soul. We know about actual graces and sanctifying grace, for example. They are not in the natural order, so simply an answered prayer is usually not a signal grace.
Signal graces are extraordinary graces that move the soul by the intellect and will in such a way that the reception of the grace — to a certain degree — can even be detected by others – or less commonly, even in ourselves.
So I guess they can be a “sign” of God’s mercy, but we should know that all grace is God’s mercy whether or not it is detectable. Most grace, afterall, is not able to be detected.
A lot of times, God grants signal graces when He desires not just the conversion of a soul, but a conversion that will take the soul to a whole different level of faithfulness, preparing them for the person’s new phase in life. The best examples of these are in “conversions” that are very noticeable and abruptly life changing. The conversions of saints like St. Augustine of Hippo and St. Mary Magdalene are great examples of persons who have received signal graces. They received extraordinary graces that changed their hearts and minds to such a degree that they changed their lives entirely to live only for Jesus Christ. Other times, God is preparing the soul for death, but really, in call cases, that is always one of “4 Last Things”.
-written by someone smarter than me, I just don’t know who to credit at The Catholic Faithful.