You can hear the noise the best holding the stethoscope just below the head on the side of the block at number 7 cylinder which is the one I changed everything. You can also feel the knock with your finger when you rev the motor from the carburator slightly. I ran the car with valve cover off the noise is definately not on top. Sorry I didn't list all the info to begin with it just seems like a lot.
The puff of smoke, the bang and the knock all started at the same time and after the cam install right? Does this thing shake like it is outta balance?
Pulling the head on that side might be your next step! The sound coming from just below the head might be in the area of those valve reliefs. If it is not an issue there then it is deeper in the motor. If you can feel it up near the carb something "is rotten in Denmark" as they said in some Shakespear Play.
You seem to have isolated the issue to #7 cylinder. What does the plug look like on that cyl? I am afraid that looking at the plug is the only "non invasive" diagnostic test you can do. Wish there was a better answer. If you pull the head and see nothing I guess I would have to move to removing #7 piston.
Can you get the pan off that motor without pulling the motor? Does this motor have blow by? What is the compression in #7 cyl? I am just now starting to think a cracked piston. Perhaps a skirt cracked??? Are you sure the pistons were quality pistons? Some of the offshore junk that is out there today is attrocious. Is this noise there when the motor is cold or only after it warms up???
One last thought here. Noises can have a funny way of traveling. You say that the noise is near (most prevalent) around the base of the head at #7. Just for the hell of it check the opposit side of the block at the same crank throw that has #7. Does the noise appear at #8 near the base of the head or anywhere near #8 ? If it does it might be indicative of something common to the 7 / 8 crank throw. Just thinkin out loud here. If it is not audiable at the same relative location on #8 then it almost has to be something associated with #7.
I guess I would start thinking of your engine as a 1 cylinder engine composed of just #7 cylinder if the noise is really restricted to that location as you say it is when you use the steth. You need to look at everything associated with that #7. The more I think on this I think that removal of the head has to be the next step after you look at the plug and check the compression. Hopefully that is not followed by removal of the pan.
I would be really concerned by the fact that you can feel the knock up by the carb. Whatever you do don't rev this engine up ...you already know there are issues at 2500 RPM. If someting is getting ready to quit you don't want an "inspection hole" in the side of the motor.
I am afraid that you have to get aggressive by taking this apart to see what is cooking in there. Check the plug first then the compression. IF everthing passes muster then I think you have to head for the tool box.
Wish I had something simpler as an answer!