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Will rate hike ruin Santa Claus rally?

As we gather for the annual holiday festivities, that kick off this week, in earnest, our kids are constantly asking, "Is Santa Claus coming to town?"

You could ask the same thing about Wall Street. The "Santa Claus Rally," as it's known, is the frequent rise in stock prices between Christmas and New Year's. Though stocks frequently rally before the holiday week actually begins.

Santa Claus waves to the crowd during the Macy's Thanksgiving Day Parade in New York City.
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Santa Claus waves to the crowd during the Macy's Thanksgiving Day Parade in New York City.

There are several reasons for the rally, including anticipation of the "January Effect," in which small stocks outperform their big-cap brethren in the first two weeks of January; the typical rise in stocks in the first week of January as fresh investment dollars are put to work and simply a strong seasonal tendency for stocks to rise between October and May each year.

This year may be different in so far as the Grinch could steal Christmas, if the Federal Reserve does, indeed, raise interest rate on December 16th, at is next policy-setting meeting.

The rate hike, now widely anticipated, is an unusual lump of coal in investors' stockings, given that it would be the first interest-rate hike from the Fed in nearly a decade.

The market appears to have already priced it in, but, what will truly determine whether or not the Fed steals Christmas will be found in the statement from that meeting when the Fed first hikes rates — will policy makers give any clues about the future path of rates?

Despite fresh geopolitical risk, softening economic data, both at home and abroad, and the continued decline in commodity prices, the Fed remains insistent that it is ready to go. If the Fed indicates it will raise once and then spend many months assessing the impact, Santa Claus will be coming to town. If, however, the Fed is prepared to launch a sustained series of hike, expect the Grinch, Scrooge, and the Ghost of Christmas Future to descend on Wall Street and spoil an otherwise festive mood.

From a trading and investment perspective, I would hedge S&P exposure by owning the TLT, which is an ETF that tracks the 10-20-year Treasury note and goes up in price as long-term interest rates fall.

Long-term rates could fall if the Fed appears poised to do more than just lift short rates off zero, simply because that tracks the 10-20-year Treasury notes sustained increase in the cost of money would likely weaken the economy, hence rates would drop and the yield curve would flatten in anticipation of a more dour outlook.

Having equal part S&P (the SPY ETF) and TLT hedges market risk, while holding onto high-conviction positions that dominate their industries, think Disney, Comcast, Apple, Facebook; and a handful of stocks that could, ultimately be consolidation targets, like J.M. Smucker, Gilead Sciences and Celgene, could be a nice barbell strategy that produces gains no matter whether the Fed plays Grinch, or Santa, come the middle of next month.

Susan Barr | Getty Images

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.