I removed the head the other day and i noticed that the little groove on the end of camshaft did not match one on cam sprocket. It was eeny weeny to the right, less than half inch. So i wonder should i install the sprocket so that the both grooves match perfectly? Or is it just the chain that has loosened over time?

According to Tom Monroe's book, pages 130 & 131, "if it's to the left it's retarded and the sprocket should be re-positioned clockwise to the next dowel hole and align 2 timing mark at teeth-if originally at 1- to bright link". That makes no sense to me though but that's what he wrote.

EDIT: Could it have gotten off TDC a little?

Edited May 8, 201311 yr by siteunseen

Is the motor still at TDC? I recently went through a head rebuild on a 71'. After sending the head off it didn't come back at TDC, so maybe check that both are in the correct position. I was able to have them line up exactly, to ensure the timing and TDC were correct on both.

Chase

You meant half of a millimeter, right? Not half an inch. And the groove should be on the cam shaft retaining plate, matching a notch in the sprocket. The groove doesn't move, but the notch of the sprocket does.

Make sure the engine was being turned the correct way when setting TDC. Otherwise you can get slack in the chain and the mark won't be where it would be when the engine is running.

"After adjustment" is close to where you want to be.

I put chain sprocket to nr.2 position, its not that loose yet but what the heck. The grooves now match perfectly at TDC.