(FORTUNE Magazine) – Martin Zweig, 45, market forecaster, money manager, and publisher of the Zweig Forecast newsletter, keeps a real traffic light by his desk. Early in October it flashed a red signal to readers of his $245-a-year publication, warning that the market might be heading for big trouble. Just after Black Monday, his forecasting model switched to green, and he advised clients to buy stocks. But now the model is flashing amber, and Zweig is not sure where the market is headed beyond the next several months. Zweig's is one of the few newsletters whose picks have paid off. The Hulbert Financial Digest calculates that securities picked by the Zweig Forecast were up 349% from July 1980 through November, making it No. 1 among newsletters tracked. Zweig manages $900 million for institutions and $90 million for wealthy individuals, plus the Zweig Fund, a $325 million closed-end mutual fund. Interviewed by FORTUNE reporter Andrew Serwer, Zweig talked about the market's uncertain direction and which stocks he likes now.

Why did nearly everyone miss the crash? There were warning signs, such as exceedingly high stock valuations and rising interest rates, but maybe there weren't enough of them. I had reduced to 8% the portion of my portfolio invested in stocks. If I had been more certain, I would have been completely in cash. Fortunately 1% of the portfolio was in puts, which on average went up 20-fold between late September and October 20.

Which way will the market move next? I think it will rise another 100 to 200 points, let's say to 2150 on the Dow Jones industrials. Whether it will peak in January, March, or April, I don't really know. I don't think we'll see the beginning of another bull market.

Why? Because we have a good chance of heading into a severe recession. Since the Dow began in 1885, we have never had a decline of more than 30% during peacetime that wasn't followed by a recession or a depression. On the other hand, a mild slowdown would be good for stocks because it would mean lower interest rates.

How do bonds look now? I recently sold them, but I'm thinking about buying. If the economy fares as poorly as I think it will, this is an appropriate time to buy bonds.

What stock groups does your forecasting model lead you to? I don't pick stocks by industry. I use computer screens to find stocks that have earnings momentum. I also look for stocks with low price/earnings multiples -- not necessarily the lowest but certainly not out of sight. And I look for companies whose earnings are exceeding Wall Street analysts' projections. Analysts are slow to revise their estimates on the upside, and when they do these stocks usually end up climbing.

Do you look at buying and selling by insiders? Yes. I don't need to see insider buying to purchase a stock, but I turn a little queasy if there is too much insider selling.

What is your computer turning up? It picked out quite a few cyclical companies right after the crash, like Phelps Dodge, but I recently sold most of them, except the steelmaker USX, because they had gone up so fast. Steel stocks have been strong. Of course, half of USX's revenues now come from oil, and the price recently dropped. Still, I'm hanging on because I think USX should continue to perform well.

Any picks that would do well in a downturn? I think Walt Disney would. During the Depression, movie stocks did very well because no one stopped going to the movies. People want reasonably priced entertainment and Disney has it. Folks might stop going to Europe, but they won't stop going to Disney World. Baxter Travenol, a maker of medical supplies, is another defensive stock that would be a good bet in a slowdown. It also benefits from the low dollar.

What about stocks that have earnings momentum? Apple, which I recommend, is a good example, although its P/E is 25 times earnings in the latest four quarters, well above the market average. General Instrument, a maker of electronic components and systems that sells for 19 times earnings, turns up in our computer screens.

Which of your picks have low P/Es? Northwestern National Life sells for just six times earnings in the latest four quarters. Louisiana Pacific, a forest products company, sells for a P/E of 12.

Any special situations? I am recommending Caesars World, which is restructuring to fend off a takeover bid. Its gambling business generates tons of cash, but it faces tough competition and I am not thrilled by the company's debt load. Caesars, however, does have solid earnings momentum.

You recommend a 20% position in stock index futures. Isn't that a most dangerous game? Not for smart investors who know how to hedge. Index futures are a cheap / way of moving in and out of the market. Commissions are virtually zilch. I went long, betting that the market would go up, about a week after the crash. So far index futures are up 23%, which is twice as much as the market because they are leveraged two to one.