Hmm, it seems unlikely that looping it like that would cause severe overheating issues. When your temperature dial is turned to "cold" the heater core is basically blocked off & dissipating minimal heat (it gets HOT, but no air is blowing by to take that heat away, so the hot coolant basically passes through unabated). Looping things shouldn't make a difference. Besides, the hot water returning from the heater core feeds more or less back to the water pump & it'll go right through the radiator if it is hot enough to open the thermostat.
You could always try plugging the heater core hose ends just to see if it makes a difference.
If I had to guess, I'd say that there's an air bubble trapped by the temp sender. How hot does the gauge read, and how does it behave at start / within the first 5 minutes of running? When you filled the system, how much coolant did it take & how did you bleed it? Did you make sure to clear the little bypass groove in the thermostat housing?