If you know the place of the item being moved, you could have a sub-function that says that while the li is in a state of being dragged, the nth li has a dashed border.
I'm not sure I can right out the code off the top of my head, but basically, when the sortable function in in play, it moves the other list items up and down in the actual DOM, so, for example, if you set the css of the 3rd list item to have a dashed border, it wouldn't matter if the list items move around like crazy, because whichever one slides into that spot will be the 3rd list item and thus get the dashed border.
What you can't do is have the slot stay vacant while the user moves thing around (I don't believe) as then the list items aren't visually making room for the drop. Essentially as you drag the item, the DOM is being adjusted to slide up where the missing list item was...