With the crank at TDC (#1), the camshaft dowel pin should be at 12:00 as shown in the picture below. Chances are, the camshaft was installed into the head on the bench, either by yourself or someone else. Even without the cam gear being installed, the dowel pin has to be at 12:00
before you drop it onto the block. If it wasn't, then the head was not timed to the block/crank.
You said that you set the head according to the piston... and that the intake and exhaust valves were closed. I'm not saying you did it wrong, but what you've said isn't specific enough to determine if was properly timed. Remember, both valves will be closed for nearly all of the compression AND power stroke. That's two strokes, one revolution of the crankshaft. So by saying that both valves were closed, you really haven't narrowed anything down at all. The only way to know that it's properly timed is to have that dowel pin at 12:00 while the engine is at top dead center. And they both need to be in their respective positions
before the head is installed.
Did you do it this way?
As for the distributor, yes, it needs to go in pointing to the #1 cylinder...approximately the 9:30 position. Now, I will point this out just in case. On a 1989 B2600i, things are slightly different with respect to the distributor because it's a different unit. When it gets installed, the rotor points to #1 cylinder, but it's in the 12:00 position (when viewed from the driver side fender.) I point this out just in case you've had an engine swap or something. I doubt that is the case but occasionally, I do talk to people who have made engine swaps between 89 and the 90+ trucks. But, I think we need to get the compression situation figured out first before worrying about the ignition timing.
If you have access to a compressor, I would get an air hold fitting and pump some air into the #1 to see where it's leaking from. Set up #1 cylinder to TDC. Pump in some air, and then listen to see where it's leaking... or where it's leaking the most. Open the oil filler and listing there. Pull the intake hose and listen through the MAF end of that or the throttle body or intake pipe (open the throttle whichever you listen through.) And last, listen through the exhaust.
If it's loudest at.....
Oil filler = Rings
Intake /Throttle Body = Intake Valve
Exhaust = Exhaust Valve
Here is the pic. Notice the dowel pin at 12:00, just behind the distributor drive gear.