Human sociality depends upon the benefits of mutual aid and extensive communication. However, diverse norms and preferences complicate mutual aid, and ambiguity in meaning hinders communication. Here we demonstrate that these two problems can work together to enhance cooperation through the strategic use of deliberately ambiguous signals: covert signaling. Covert signaling is the transmission of information that is accurately received by its intended audience but obscured when perceived by others. Such signals may allow coordination and enhanced cooperation while also avoiding the alienation or hostile reactions of individuals with different preferences. Although the empirical literature has identified potential mechanisms of covert signaling, such as encryption in humor, there is to date no formal theory of its dynamics. We introduce a novel mathematical model to assess when a covert signaling strategy will evolve, as well as how receiver attitudes coevolve with covert signals. Covert signaling plausibly serves an important function in facilitating within-group cooperative assortment by allowing individuals to pair up with similar group members when possible and to get along with dissimilar ones when necessary. This mechanism has broad implications for theories of signaling and cooperation, humor, social identity, political psychology, and the evolution of human cultural complexity.