engine heats up then cools down??

have a 94 f-250 460ci ... when it runs the temp gauge warms up and cools down... i have replaced the thermostate and cap on radiator and it still does it.... it will only reach the n on normal then drops back to the very first mark..should it be running hottet?...and y does the temp gage fluctuate.... the heater also only blows luke warm air and seems to be hotter in the vent position then in defrost are floor...every thing seems to look like its working fine when switching from floor to vent and defrost and vice versa.... heater hoses are very hot and the heater core is hot also..... any one have any thought on what it could be r what to check next... thanks