The act of sticking you whole hand up someones asshole, then pulling it out and smearing it on them, openhanded, in a semi-circle pattern to resemble a rainbow. Similar to a dirty sanchez, but this is much bigger and can be done on other parts of the body.
Originally she was refered to as Lindsay "Rainbow" Lohan because her fans imagined that's what she would smell like (like a rainbow). But since 'rainbow' can also be used to describe her appearance - in it being very colorful and radiating a similar positive vibe, generating smiles and so on, she quite simply became Mrs. Rainbow - a person able to bring colors into our lives and positive vibes into our hearts.