A: It only uses the first 20 bytes of the hash. You could narrow it down from this if you were really determined, but you'd not be able to reverse it.
B: The visualization of the sparkline doesn't have the fidelity to determine between characters 6 and 7. So you'd have a range of possible characters.
C: The alternative being suggested by Jakob Nielsen is no masking at all ( http://www.useit.com/alertbox/passwords.html ) - which is less secure? I know this isn't the best argument, but it still is -an- argument.
With that out of the way, my paranoid mind agrees with you in this context: just masking the passwords is the more secure solution. But that doesn't mean that experiments to provide a more usable approach with (arguably) equal security should be avoided.