Temp probe may be too short to be effective as well. From the Watts site:

"Alternate" ONLY when the tappings are not provided:
Use standard or extra length extension thermostat which permits the end of the thermostat to extend into the top 6" of the tank.


For Heaters with Direct Top Tapping:
Always use an extension type thermostat T&P relief valve which permits the end of the thermostat to extend into the top 6" of the tank.