You can do that but you asked your question incorrectly. You should ask, what bootloader supports an OS compressed in SquashFS? You can do that with VMLINUZ (check out a live cd for more information because they use SquashFS) but as far as I know SquashFS is a read only filesystem. It gets extracted and then booted.
I have never tried using SquashFS as a R/W filesystem so either man pages, documentation, or someone will have to correct me on that.