I thought about this but all the research I could dig up said that doing the bypass hose only worked on BBC. Something about a SBC didnt circulate in a desirable direction.
If this is wrong I’ll defiantly add it.
Your small block already has a built in bypass that bypasses through the water pump. L79 and LT1 both had an additional bypass between the pump and manifold. Both were Chevy's highest performance small blocks. I never really knew why, but it came from the factory that way, so I guess some engineer thought they needed it. My guess? To help stave off pump cavitation at high RPMs. See attachment, one leg of your water pump should have 4 holes in it. 2 for bolts, one for regular flow and one for bypass.
Both small and big blocks circulate coolant in the same way. Big blocks do not have the built in bypass and were equipped with a bypass hose from the pump to the manifold.
I doubt your overheating issue is caused by timing, but it is something you will eventually want to get right. You should start by verifying the correct location of your timing mark on your harmonic balancer by using a TDC piston stop tool and the procedure to locate and mark true TDC on your harmonic balancer. Most of these engines run best with 18 initial and 36 all in timing with the vacuum advance disconnected and plugged. After your timing is dialed in set the carb fuel idle adjustments for best vacuum reading or best rpm. Then set your idle speed to your taste or spec and connect the vacuum advance. You can play with your curve once you get your cooling issue under control.
Your symptoms show signs of an improperly functioning thermostat. It's not opening at the correct time. Your cooling system appears to be up to the task of cooling at idle or your temps would never come down from 240 once you got to that point at idle. It's possible that you were sucking some air from the leaks you discovered with the compression test. It's also possible to get a steam pocket, both might hinder thermostat operation by isolating coolant from the thermostat in the form of an air pocket. The air would end up stopping at the highest point, the thermostat. For that reason, and initial fill and to get past having to burp the system, thermostats with jiggle valves or some sort of bypass were invented. Most cheese variety thermostats won't have this feature, so we drill a 3/16 hole as a bypass to help eliminate these issues.
So, throw a new $10.00 thermostat in there with a bypass hole added. Then tune her up. Your best temp range to avoid excessive cylinder wear is above 180 degrees for a street car. If you run a 160 and your cooling system is capable of running that low continuously, your best bet would be to install a 180 degree thermostat to help get into the correct operating range for longer engine life. If you live in a cold area, just run a 1/8 hole in the stat as a bypass, in your case it's just there to pass air.