I don't understand the "funky junky hat dance" in Wizards of Waverly Place....?

Question

They always burst out into this dance and it confuses me. What is it talking about? What is it referencing?

The lyrics are:

What's That?

A Hat

Crazy Funky Junky Hat

Overslept

Hair unsightly

Tryin' to look like Kiera Knightly

We've Been There

We've Done That

We see right through your funky hat.

Answer 1

Like if they see someone with a hat on, they sing that song thinking maybe that the person with the hat on has had a bad hair day

"overslept, hair unslightly, tryin to look like keira knightly"

get it??

Answer 2

its just like a symbol of best friends and stuff and when they say it they say it when someones wearing a hat and then they  do it but its most likely like a best friend deal

Answer 3

if they see a hat on some one them they start do do the dance it means that they are trying to hide a bad hair day with a hat basicly